Zenith Bank's N244 billion profit in 2021 driven by a cost of funds reduction

Zenith Bank's N244 billion profit in 2021 driven by a cost of funds reduction

Zenith Bank Plc saved significantly more than N14 billion in 2021 due to a reduction in interest expenses to N106.8 billion. The cost cuts helped the company improve its after-tax profit by N14 billion to N244.6 billion at the end of the year.

According to the bank's audited financial report for the fiscal year 2021, management reduced the cost of funds for the second year in a row, following a drop of 18.4 percent in 2020. Interest expenses fell even more last year, bringing the bank's total to the lowest level in eight years.

Since cutting interest expenditures by a third to N144.5 billion in 2018, the behemoth bank has been on a low-cost strategy. Since then, the cost of financing has been on the decline, with the exception of a 2.8 percent increase in 2019.

Interest income has also been on the decline, with a loss of 7% to N440 billion in 2018. Interest earnings have remained significantly behind the bank's highest total of N474.6 billion, with a tiny increase of 1.6 percent to N427.6 billion.

The net result is that cost of funds is falling faster than interest income, indicating the bank's cost-cutting efforts in recent years.

Zenith Bank generated N2.93 in interest income in 2014 by incurring a naira in interest expenses. Interest gained with the naira of interest expenses has increased from N3.05 in 2018 to N3.47 in 2020, and then to N4.0 by the end of 2021.

Interest expenses claimed a lower percentage of interest revenue, dropping from 29% in 2020 to 25% at the end of 2021. The decrease in interest expenses resulted in a net interest revenue gain of more than N21 billion, bringing the total to about N321 billion at the end of the year.

The third-quarter increase in loan impairment expenses became much more pronounced in the fourth quarter. The last quarter accounted for N31 billion, or more than half of the N60 billion in loan impairment expenses for the year.

For the third year in a row, this resulted in a significant increase in credit losses for the bank. After a 64.5 percent increase the previous financial year, impairment costs on financial assets increased by around 52 percent.

General operational expenses, which increased by about N33 billion to over N180 billion in the year, added to the cost strain. Personnel and other costs, on the other hand, were well controlled by management.

The aim this year was to create enough income and extract as much cost savings as feasible to offset cost increases while maintaining profitable growth. The only cost savings were in the form of lower fund costs, which management took use of to the fullest extent possible.

Non-interest income accounted for a large portion of the revenue increase for the year. Zenith Bank increased its gross earnings by nearly 10% to N765.6 billion in 2021, compared to a 5% gain in 2020.

Only two income sources contributed to the year's increase in gross earnings. One example is trade profits, which increased by 57.6% to almost N167 billion. The other is a net fee and commission revenue, which increased by 31% to N103 billion.

The bank's primary strengths in 2021 will be the significant cost of funds reduction and revenue growth from non-interest income. The strengths were used to compensate for the two significant flaws of a massive increase in loan impairment expenses and increasing operating costs.

Zenith Bank ended its operations in 2021 with a balance sheet of N9.4 trillion, an increase of N967 billion over the previous year's ending total of N8.5 trillion. Its main assets are N3.3 trillion in loans and advances, N1.8 trillion in Treasury bills, N1.5 trillion in cash and bank balances, and N1.3 trillion in investment securities.

The bank's assets are made up of N6.5 trillion in deposits, a N1.3 trillion equity buffer, and N750 billion in borrowings.