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Zenith Bank: profit doubles from biggest cost saving - THE CITIZEN

By The Citizen

Zenith Bank Plc closed its 2012 operations with the biggest cost savings achieved in recent years. Two key cost items either declined or moderated to permit the doubling of the bank's profit figure during the year.

The biggest cost saving came from net provisions for risk asset losses, which dropped by 45% in the year from N16.51 billion in 2011 to N9.10 billion last year. The bank thus reversed the major expansion of the loan loss provisions figure, which rose by more than 279% in the preceding year. This means a good part of earlier provisions have been written back into profit.

A major cost saving from the reduced provisioning requirement provided the strength for the bank's exceptional profit growth in 2012. The share of gross earnings claimed by provisions fell from 6.8% in 2011 to 3.0% in 2012.

Another major cost saving came from operating expenses, which only inched up by 3.0% in 2012, making a sharp slow down from 21% rise in 2011. Compared with an increase of 26% in gross earnings, operating cost margin declined from 47.6% in 2011 to 38.9% in 2012. This represents the lowest cost margin for the bank in several years.

With the moderation of operating cost, the bank has sustained a low cost move for the second year. It used to spend well over one-half of its gross earnings in operating cost. The cost margin went down from 50.8% in 2010 to 47.6% in 2011 and further to 38.9% in 2012.

The favourable impacts of the drops in the two major cost elements on revenue in 2012 enabled the bank to raise net profit by 107% to N100.15 billion. The cost savings were further boosted by the strong growth in revenue during the year. The bank raised gross earnings by 26% to a new peak of N307.08 billion, one of the biggest revenue figures in the banking industry.

The bank's revenue shows a sustaining growth from the increase of 26.8% in the preceding year. Interest income, which grew by 36% in the year, contributed an increased share of the gross income at 72.1% compared to 66.9% in 2011. Fee-based income grew at a lower pace than revenue at 20%.

Interest cost was the only major cost item that failed to moderate in the year. It rose well ahead of gross earnings at 85% compared to 26%. It also rose well ahead of interest income and therefore depressed net interest margin. Interest expenses claimed an increased proportion of revenue at 21% in 2012 against 14.3% in 2011.

Deposit liabilities grew at a far lower pace of 17% than the 85% expansion in interest cost. The average cost of the naira of deposits therefore rose from 2.1% to 3.3% over the period. Rising cost of funds is in line with the trend in the banking industry and the general economy during the year.

The overall cost behaviour was highly favourable for the bank in 2012. The biggest proportions of the N63.13 billion net revenue growth in 2012 and huge cost savings were converted into profit. The bank therefore lifted net profit margin from 19.8% in 2011 to 32.6% in 2012. This is the highest profit margin the bank has achieved in many years.

The full year profit figure shows that growth accelerated in the final quarter from N64.06 billion at the end of the third quarter. Further improvement in profit margin accounted for the step up in profit growth in the last quarter. Net profit margin improved from 28% in the third quarter to 32.6% at full year.

So far in the banking sector, Zenith Bank is beaten on profit margin only by GTB, which converted 38.8% of its gross earnings into net profit in 2012. It is well ahead of Access Bank with a net profit margin of 20.6%, Diamond Bank – which recorded 15.8% net profit margin and Sterling Bank with net profit margin of 10.6%.

The increase of 36% in interest income is against an 11% improvement in the volume of loans and advances. This means the bank achieved an increased interest yield per naira of outstanding credit last year. It earned average interest of 22.4% per naira of loans and advances compared with 18.3% in the preceding year.

Net assets per share grew from N12.56 in 2011 to N14.74 at the end of 2012. During the same period, GTB improved net assets per share from N7.83 to N9.63. The bank raised earnings per share from N1.54 in the preceding year to N3.19 in 2012. Over the same period, GTB grew earnings per share from N1.69 to N3.06.

Unless beaten by First Bank, Zenith Bank looks likely to lead the banking sector on earning per share. It was slightly ahead of First Bank on earnings per share at the end of the third quarter. The accelerated growth recorded by Zenith Bank in the last quarter could widen the gap.

The bank has declared a dividend of N1.60 per share, a pay-out ratio of 50.1%. The dividend yield is 7.6% based on the share price when the dividend was announced. This beats GTB's dividend yield of 5.2% but is only slightly ahead of Access Bank with a total dividend yield of 7.4%. The register of Zenith Bank's shareholders has closed on 12th April while payment date is scheduled for 24th April 2013.

The outlook for 2013 indicates stable growth in revenue and profit for Zenith Bank. With high credit quality standard and sustaining high interest rates in the money market, revenue capacity remains intact. New provisions are not expected to erode the earning power and again the low cost margin is expected to be maintained, which are expected to defend the bank's high profit margin in the current year.