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Zenith Bank: How To Stave Off Profit Erosion

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Posted: Apr 22, 2016 at 3:02 pm   /   by   /   comments (0)

 

Kirk Leigh

 

The profit drop suffered by Zenith Bank in the last financial year continued in the first quarter of 2016, demonstrating the power of external factors to shape a company’s bottom-line and the need for the bank to urgently deploy winning strategies to reverse the situation.

The bank was one of the leading banks not to issue a profit warning in the face of significant headwind. For some banks the headwinds translated to impairment losses. Affected banks cited challenging macroeconomic environment along with “fiscal and monetary headwinds, which have resulted in marked reduction in domestic output”.

The bank’s impairment line item does not betray a weak position even if it rose 23.3 percent during the period, growing to N2.6 billion from N2 billion. This also means that the bank has to maintain or improve its current non-performing loans level, the lowest in the industry at 2.2.

The bank’s marketing machine brought in a gross return of N99.44 billion in the first quarter of 2016, a showing which is 12.3 percent less than the result for the equivalent quarter in 2015.

The depressed state of Nigeria’s economy, which has had a ghastly effect on the naira and growth indices, suggests that the bank may not do better than it did in the last financial year, though these may be yet early days for such a prognosis.

Analysts say otherwise as they note that the bank’s interest income metric is on the rise relative to the equivalent quarter in 2015. The metric grew 3.4 percent to N84.18 billion from N81.42 billion. It sets the stage for the bank doing better than the N432.5 billion in gross returns achieved last year.

However, exposure to the oil and gas industry may be the Achilles heel to disrupt such a trajectory. But the bank had, while presenting its 2015 results to stakeholders, said it has a well laid out plan to mitigate such a risk.

Part of the bank’s plan is to “hedge against drop in crude oil price for customers with loans; encourage customers to increase production capacity to generate more cash flows; customers are diversified into gas production and restructuring loans in line with expected cash flow.”

The bank though needs to watch the cascading rise of interest expenditure, which rose 33 percent in the quarter relative to the equivalent period in 2015. This may be nothing to worry too much about against the backdrop that net interest income which is a balance of the relationship between interest income and interest expenses had a commanding 36.4 percent improvement from N42.6 billion to N58.16 billion.

The first indication that bottom line profit was going to be less impressive as the equivalent quarter in 2015 was the 3.2 percent backtrack from N33.13 billion to N32.12 billion.

This had little impact on pretax profit, which had only a 4 percent set back from N27.68 billion to N26.57 billion even if the tax obligation for the two periods are nearly identical at N5.5 billion for the first quarter of 2016 and N5.44 billion for the first quarter of 2015.

Despite the fall in absolute bottom-line figures, the bank made significant efficiency gains along those lines as pre-tax profit margin and net profit margin looked upwards.

Pre-tax profit margin or how much the bank was able to translate of gross returns into pre-tax profits rose to 32.3 percent from 29.2 percent.

Net profit margin also trended upwards to 30 percent from 24.4 percent, meaning the bank was able to translate more of gross returns into net profit.

Supremely confident, the bank is banking on “excellent service delivery and development of superior asset quality, strong capital base, professionalism and corporate governance to outperform its 2015 showing.

“Going forward, our challenges will include, though not limited to, further elevating our standing as a reputable financial institution by establishing a corporate structure that can stay imperturbable. However, I am glad that we are well positioned and adequately equipped to remain at the forefront of Nigeria’s financial services sector”, Peter Amangbo, group managing director/CEO said.

“Barring any unforeseen circumstances, management is of the opinion that the Group is poised to continue to optimally deploy its investable funds as well as effectively manage its costs. We expect these to translate to an on-target performance in the 2016 financial year with strong emphasis on agriculture and the real sector while providing support to local production and manufacturing”, he further said.

Analysts from Afrinvest tend to agree even if they disagree with the bank’s bottom-line optimism.

“Based on FY:2015 actual, we maintain our 8.4 percent Y-o-Y growth in gross earnings to N469.3 billion in FY:2016 but lower PAT Y-o-Y growth to 1.4 percent from 6.5 percent in FY:2016. Projected PAT figure improved marginally to N107.1 billion from initial forecast of N106.6 billion due to a lower expected Cost of Risk (CoR) of 1.0 percent from 1.3 percent”.