…FX trading losses and a sharp increase in tax expense overshadowed lower credit impairment charges, exposing the challenges of converting operating performance into shareholder returns.
MON OCT 12 2026-theGBJournal| Zenith Bank Plc’s first-half results offer a striking illustration of how a bank can increase its pre-tax earnings yet deliver substantially less profit to shareholders.
A reversal in foreign exchange trading and a sharp increase in income tax expense overwhelmed the benefits of lower credit impairment charges, exposing the competing forces shaping the lender’s profitability.
The bank reported a 1.9% year-on-year increase in profit before tax to ₦637.60 bn for the six months to June 2026, but profit after tax fell 19.1% to ₦430.76 billion. The divergence was driven by a ₦113.39 billion increase in income tax expense, which more than offset the ₦11.98 billion improvement in pre-tax earnings.
The figures point to a more complicated earnings picture than the headline decline suggests. While Zenith retained its capacity to generate substantial pre-tax profits, the composition of those earnings became less favourable, with weaker interest income, a sharp reversal in trading income and higher operating expenses limiting the benefits of improving credit costs.
The most dramatic movement came from foreign exchange trading. The bank swung from a gain of ₦268.49 billion in the first half of 2025 to a loss of ₦284.90 billion in the corresponding period of 2026, a negative swing of ₦553.39 billion. That reversal overwhelmed improvements in net fees and commissions, foreign exchange revaluation gains and loan recoveries.
The shift highlights the difficulty of interpreting bank earnings when volatile trading income accounts for a significant part of the movement between reporting periods.
Last year’s trading gains provided a substantial boost to reported profitability; this year’s losses created a considerable drag. The resulting decline in profit after tax therefore reflects not simply the strength of the bank’s underlying operations, but also the changing contribution of a volatile income stream.
There was, however, some resilience beneath the headline numbers. Operating income increased 5.3% year on year to ₦1.27 trillion, supported by an improvement in net interest income after loan-loss expenses.
But the source of that improvement matters: net interest income declined, while a sharp reduction in impairment charges provided much of the relief.
Interest income fell 8.9% to ₦1.68 trillion, as weaker returns from investment securities and loans to other banks outweighed a modest increase in interest earned on customer lending.
Income from investment securities declined 15.9%, alongside a 47.3% reduction in securities holdings, while interest income from loans to customers increased just 1.1%, despite a 25.5% expansion in the underlying loan book.
The divergence raises a question about the returns being generated from the bank’s expanding customer lending portfolio. Loan growth is an important driver of future interest income, but its contribution to profitability depends on pricing, funding costs, asset quality and the speed at which new lending translates into interest revenue.
Lower funding costs offered some relief. Interest expense declined 13.0% to ₦421.80 billion, reflecting a sharp reduction in interest paid on borrowings that more than offset higher expenses on customer deposits. Yet the reduction was insufficient to prevent net interest income from falling 7.4% to ₦1.25 trillion.
The pressure on interest earnings was also reflected in net interest margin, which declined to 8.8% in the first half of 2026 from 13.7% for the full year of 2025.
Although the periods are not directly comparable, the movement reinforces the need to examine whether Zenith can sustain lending growth while protecting the spread between the income generated by its assets and the cost of funding them.
Lower credit costs provided the clearest offset. Impairment charges fell 81.5% to ₦141.12 billion, helping net interest income after loan-loss expenses increase 87.4% to ₦1.11 trillion.
The improvement is significant, but it does not necessarily indicate a corresponding strengthening in recurring revenue. Lower impairment charges can support profits by reducing the amount set aside against potential credit losses, but the durability of that benefit depends on the quality of the loan book, recoveries and the adequacy of provisions as lending expands.
The distinction matters because a bank cannot indefinitely rely on declining impairment charges to compensate for weaker income generation.
If credit costs have normalised after an unusually elevated comparative period, the benefit may be difficult to repeat at the same magnitude. If they reflect a lasting improvement in asset quality, the resulting earnings relief could prove more durable. The reported figures alone do not establish which explanation carries greater weight.
Operating expenses added another layer of pressure. Costs increased 9.0% to ₦633.76 billion, driven in part by a 52.1% rise in information technology expenses, alongside higher personnel and depreciation costs. With expenses growing faster than operating income, the cost-to-income ratio deteriorated to 44.9% from 29.5% a year earlier.
The increase in technology spending may support the bank’s longer-term competitiveness and operating capacity, but its immediate effect was to absorb a larger share of income.
The widening gap between revenue and cost growth will therefore be an important indicator of whether Zenith can improve efficiency as the contribution from trading income fluctuates.
Ultimately, taxation turned a modest increase in pre-tax earnings into a decline in shareholder profit. Income tax expense rose 121.3% to ₦206.84 billion, lifting the effective tax rate to 32.4% from 14.9% in the first half of 2025.
The increase raises an important question about what drove the higher tax burden, which cannot be settled by the headline figures alone.
Changes in the composition of taxable income, deferred taxation, prior-period adjustments and other tax-related factors can influence the effective rate.
The bank’s tax disclosures will be necessary to distinguish between a potentially recurring increase in its tax burden and a period-specific effect.
The central issue now is whether Zenith can translate its substantial earnings base into more predictable growth in profit after tax.
Its higher pre-tax earnings, stronger fee income and lower impairment charges provide reasons not to interpret the decline in net profit as evidence of a wholesale deterioration in the business.
But weaker net interest income, volatile foreign exchange trading and rising operating costs point to pressures that warrant closer scrutiny.
The board’s proposal to increase the interim dividend to ₦1.50 a share from ₦1.25 indicates a willingness to maintain shareholder distributions despite the decline in profit.
Whether that commitment can be sustained will depend on the trajectory of earnings, capital and cash generation, rather than the dividend announcement alone.
Zenith’s first-half performance ultimately exposes a distinction that matters increasingly to investors: generating pre-tax profit is not the same as converting it into sustainable shareholder earnings.
The challenge for the second half will be to strengthen recurring income, contain operating costs and reduce the extent to which profitability depends on volatile trading results and the continued relief provided by lower impairment charges.
By the G&B Analysts
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