zimbabwe financial services sector analysis 30 june 2012

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FBC Securities Research

FBC Securities (Pvt) Ltd

2nd Floor Bank Chambers,

76 Samora Machel Avenue,

P.O Box 1227, Harare, Zimbabwe

Tel: 263-04 -700373/700928/797765-67

Fax 263 -04 -704492

Website: www.fbc.co.zw

Overview of the Financial Services Industry

Notwithstanding the turmoil that has haunted the sector since the inception of the

multi currency regime, fortunes seem to have taken a positive turn in one of the

oldest financial systems in Africa. After having survived a decade long

astronomical hyperinflationary climate, unemployment above 95%, negative

economic growth and industry capacity utilization below 20%, Zimbabwe’s

financial services sector is on the mend with 13 out of 16 commercial banks

recording profits in the Half Year period to 30 June 2012. The financial services

sector has been the fastest growing sector in the economy with an average growth

rate of 13% since 2009 and a growth projection of 23% to FY2012. Despite

numerous hurdles that have sought to impede growth in the sector, among them,

dented confidence impending from the promulgation of the economic

empowerment regulations, unsustainable debt overhang above US$10 bil

undermining the economy’s ability to attract offshore lines of credit and the

absence of a functional lender of last resort, we however remain unyielding that

the sector is poised for growth.

June 2012 Financial Sector Overview

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Architecture of the Banking Industry in Zimbabwe

Zimbabwe’s Banking Sector by the 30 June 2012 constituted of:

16 Commercial banks 2 Merchant Banks 4 Building societies 1 Savings Bank 16 licensed Asset Management Companies; 172 operating microfinance institutions

The Macroeconomic Environment

Despite the stability that has characterized the multicurrency regime since inception, growth has started to level off, GDP growth was revised down to 5.6% amid drastic underperformance of key sectors like Agriculture (2012 revised growth rate 5.8%) and Tourism (revised growth 10.4% down 3.3%), the projected budget has been revised down from US$4 bil to US$ 3.640 bil putting pressure on key sectors of the economy to do with below budget funding. Meanwhile, a strengthening rand and firming oil prices have continued to

threaten the sustainability of this single digit inflation going forth Notwithstanding the above economic developments, the following challenges were embedded within the Macroeconomic Environment:

Policy reversals and inconsistencies; Indiscipline in the financial sector; Deterioration of infrastructure. Adverse global economic developments; Difficult external sector position; Persistently recurrent liquidity challenges; The negative effect of sanctions; Widespread closure of companies; and Limited fiscal space.

Listed Banks

Unlisted Banks Merchant Banks

Building Societies

Savings Bank

BancABC Agri bank Capital Bank

CABS POSB

Barclays Stanchart Tetrad FBC

CBZ Stanbic CBZ

FBCH MBCA ZB

Trust MetBank

NMB ZABG

ZB AfrAsiaKingdom

TN Bank EcoBank

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3 FBC Securities Research

Operational Overview

The overall banking sector remained in a safe and sound financial condition, notwithstanding the challenging macro-economic environment characterized mainly by market illiquidity, low savings, volatile deposits and short term loans.

Financial intermediation improved as reflected by the growth in deposits and lending to the productive sectors. Total deposits held in by the banking sector increased marginally by 2.8% from $3.32 billion in December 2011 to $3.413 billion by June 2012 while loans and advances granted increased by 12% from $2.9 billion in December 2011 to $3.246 billion as at 30 June 2012.However , Zimbabwe largely remains a cash economy with about$ 3 billion dollars having been estimated to be circulating outside the formal market.

Despite this growth in deposits and loans, liquidity challenges have remained in the general economy due to the huge recapitalization requirements particularly in the manufacturing and mining industries.

Consequently, the banking sector’s focus has shifted to the sourcing of favorable financing structures and credit lines that match the liquidity and funding requirements of the country’s recovering economy.

The structure of Banking Deposits , has remained short term and largely transitory in nature , limiting bank’s ability to underwrite meaningful long term loans.

Volatile short term deposits, however, accounted for more than 90% of total deposits.

Sector Developments

The Reserve Bank approved the name change from Metropolitan Bank Limited to Metbank Limited with effect from 23 March 2012. Ecobank Zimbabwe Limited was granted authority to commence commercial banking business effective 15 May 2012, in terms of Section 16 of the Banking Act [Chapter 24:20]

Recapitalization of ReNaissance Merchant Bank by the National Social Security Authority (NSSA), resulted in the Reserve Bank uplifting curatorship on 2 March 2012 and the subsequent name change to Capital bank

The Reserve Bank increases the minimum Capital requirements of banking institutions as, US$100 mil for Commercial and Merchant banks, US$80 million for building societies, US$60 mil for Finance and Discount houses and US$5 mil for Microfinance Banks. Enforcement of the new Capital requirements will require the regulated institutions to be, 25% compliant by 31 December 2012, 50% by 30 June 2013, 75% by 31 December 2012 and fully compliant by 30 June 2014.

Genesis Investment bank and Royal Bank voluntarily surrendered Banking licenses after failing to meet capital requirements and manage financial and liquidity positions.

AfrAsia group came to Kingdom Bank’s rescue with a fresh injection of Capital resulting in the bank becoming a member of the AfriAsia group and a subsequent name change to AfrAsiaKingdom Bank.

Growth in mobile banking products escalates as the country embraces e-commerce: Mobile moola and Zippit by FBC, Eco-cash by Econet, global banking rises with roll out of the MasterCard by most of the banks in the country.

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HY2012 BANKING SECTORS FINANCIAL RESULTS OVERVIEW

Deposits

Total Deposits for the period at US$3.413 bil were slightly

higher than the US$3.32 bil at the close of FY 2011

On an annual basis, the growth in deposits has slowed down

after recording a 16.7% growth to June 2012 compared to a

growth of 56.5% over the same period last year.

Growth in Banking sector deposits was largely driven by

annual increase in time deposits of over 30-day, 98.18%;

under 30-day, 13.54%. The significant increase in time

deposits partially reflects the shifting of economic agents

from non-interest earning balances to interest earning

deposits.

Deposits continue to be of a short term nature, thereby

presenting worrisome vulnerabilities in the sector. In this

regard, short term deposits, which comprise of demand,

savings and under 30-day deposits continue to dominate total

deposits. The high concentration of short term transitory

deposits partially reflects that economic agents are largely

using the banking system for facilitating salary payments

rather than deliberate and planned savings.

Share of Deposits-

CBZ Bank had the largest market share of deposits at 28% as

at 30 June 2012, up from 24% in December 2011.

The top five commercial banks had a combined market share

of 63% (US$2.164 bil). The top five institutions by deposits

were CBZ, BancABC, Stanbic, Standard Chartered and FBC

which managed to narrowly displace Barclays Bank.

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Loans to Deposit Ratio’s

Total loans and advances in the banking sector increased to approximately $3.246 billion as at 30 June 2012 up 12% from $2.9 billion as at 31 December 2011. The loans to deposit ratio decreased from an average of 87% as at 31 December 2011 to an average of 71% as at 30 June 2012. The general decrease in the loans-to-deposit ratio suggests that banks are leaning towards a cautious strategy in their lending in view of the increasing non-performing loans.

Consistent with the transitory nature of deposits coupled with the attendant liquidity challenges, banking sector credit has also largely been short-term in nature against a background of a short term deposit base coupled with limited access to external lines of credit as well as high liquidity risks.

Given that loans are a function of deposits, banks with higher deposits had larger lending books, with the exception Barclays which remains conservative in its lending activities.

Of the 16 surveyed banks, 6 had loans to deposit ratios above 80%, 6 had loans to deposit ratio between 60% and 80% and 4 had a ratio below 60%. Commercial banks as expected dominated contribution to loans and advances putting in 82.92% (US$2.712 bil) while Building societies contributed US$346.21 mil (10.59%)

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CBZ was the leading bank in loans and advances to customers with $726 million in loans and advances and its loans to deposit ratio was 76%. Ecobank had the highest loans to deposit ratio of 99%, and Barclays had the lowest ratio of 29% indicating that it was very conservative in its lending.

The average market loans to deposit ratio is expected to decrease in the remainder of 2012 as a number of banks indicated that they will take a conservative approach to lending in order to contain the level of non-performing loans.

The current operating environment characterised by liquidity challenges has seen banks being reluctant to aggressively advance loans given the high levels of inherent credit risk. Strong credit risk management will remain critical for the management of loan books, while the use of collateral should enhance recoveries in the event of defaults.

Sector distribution of credit remains largely skewed towards Services sector taking up 18.62% of loans and advances, worrisome to note is the fact that lending to individuals has grown exponentially from 8.6% in June 2011 to a whopping 18% in June 2012, this rise is at the expense of crucial sectors like Agriculture which has declined from 18% to 15% over the same period and distribution which has declined from 13% to 9.4% in June 2012.

The short term lending coupled with subdued capital inflows, has deprived the economy of much needed investment in capital intensive projects which are imperative for sustainable economic growth.

The Reserve Bank has, however, noted with concern the gradual deterioration in asset quality as reflected by the level of non-performing loans which is now trending towards the watch list category. Asset quality challenges can potentially heighten liquidity risks given the current operating environment where credit is largely financed by volatile short term deposits. In this regard, it is imperative that banking institutions enhance their credit risk management systems with special emphasis on credit assessment, origination, administration, monitoring and control standards. The introduction of Basel II standards is expected to improve credit risk management practices in the financial services sector.

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Total Assets Analysis

On average Deposits accounted for about 83.2% of the industries banking assets

Meanwhile on the reverse side of the balance sheet, Loans to assets were at 58.2%.

Share of Assets

The chief top five banks continued to dominate accounting for just over 60% of the Total Banking Industry’s Assets

Of the total banking assets, CBZ accounted for the lions share at about 26.1% followed by BancABC at 10.5%, Stanbic at 9.5%, StanChart 8.8% and Barclays at 6.1%.

Sizable asset contributions were also noted in ZB, FBC, and MBCA which commanded markets shares of just slightly above 5%.

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Profitability

For the half year to June 2012 profitability seemed to be on a positive track with Banking sector Earnings before taxation at

US$59.44 mil and US$42.02 after taxation

The average PBT for the 16 enlisted institutions stood at US$3.71 mil for the half year to June 2012

Industry average ROA, calculated as per the 16 enlisted banks stood at 0.21%, with StanChart recording the highest

return at 2.31%, followed by Stanbic at 1.74% and BancABC at 1.61%.

Above average returns were noted in 12 Institutions while the remaining institutions where below average. In terms of profitability CBZ was the most profitable bank at US$17.7 million, followed by Standard chattered at US$11.05 million and Stanbic at US$10.03 million.

Three banking institutions over the period under review made losses namely Agribank ($2.43mil), Trust ($2.18mil) and ZABG ($1.63 mil). Trust bank is in the first half of its second operational year since come back and has been focusing on infrastructural development, branch roll out and market share acquisition. ZABG still struggles to sail above capitalization and efficiency concerns while AgriBank is haunted by Undercapitalization and Non Performing Assets

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Income Source

Interest Income to Total Income

A thumb rule in the banking industry is that a bank’s main income stream should be its net interest income which should be able to cover the bank’s operational costs.

The average interest income to revenue ratio for the industry stood at 74% against International benchmarks of between 65% and 70%.

Low interest income to revenue ratios reflect on Zimbabwe’s liquidity constrained environment in which lending has remained highly constrained by the short term transitory nature of deposit

With the growth in loans to deposit ratios across the industry over the year, Interest income now commands the bulk of Income composition in

many Banks except a few that are still to grow their loan books in line with Industry trends, CBZ “s ratio of Interest Income to total Income was at 126% trailed by Trust with 107%, Bank ABC with 106%, TN with 97% and FBC with 96%

Non Interest Income to total Income

Non Interest income with most banks mainly consisted of fees and commissions, dealing income and other income from sale of assets as well as fair value adjustments.

Non Interest income continued to be a key driver of banks earnings, at an industry average of 60%, 7 banks had above average ratios indicating a less aggressive lending approach compared to the other 9 with below average noninterest income contribution to total income.

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Interest Margins

High interest margins characterized the banking sectors earnings for the period with the industry average being pegged at 64% for the 16 banks analyzed compared to 66% for December 2011

Crystallizing on accessibility to cheap off shore financing, were Stanbic and Standard Charted which recorded margins of 100% a piece. Barclays and MBCA cashed in on cheap offshore support to achieve margins of 79.4% and 73.2% respectively, 12 Banks recorded below average Interest margins, 11 of which are indigenous banks bearing testimony to the liquidity squeeze in the local market pushing cost of funds high.

Resultantly, high interest margins have been experienced in the sector though not sustainable in the medium to long term. Thus future lending rates are anticipated to gradually decline translating into thin margins.

Costs to Income

The cost to income ratio can be seen as a

measure of how much banks used to generate

income. Looking at the 16 banks analyzed, the

industry average Cost to income ratio for the

period was 93% which is still above the

International benchmark standard of 75%

Out of 16 banks 10 recorded Cost to Income

ratios of below the industry average of 93%,

Stanchart continues to lead the pack in terms of

cost containment with a ratio of 62% trailed by

BancABC with 65.6% ahead of CBZ at 65.5%.

With numerous banks having gone through rationalization, retrenchment costs became a main feature of the banks

operating expenses.

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Return on Equity

ROE is a measure of the return on ownership

interest and for the period under review the

industry’s average ROE was 4.25%

The return to profitability by most of the banks

reflects increased confidence in the banking

industry resulting in an increased number of

financial transaction volumes going through

the formal banking sector. Some banks have

also moved in to tap into the large previously

unbanked market through e-commerce

products.

Yielding desirable returns on investment funds

were earnings in Stanbic at 18.66%, BancABC

(16.39%), CBZ (16.17%), Stanchart (13.76%) NMB (10.54%)

In relation to ROE, ROA tends to be a more volatile ratio depending on the structure of assets held. The return on Assets in

the banking sector tends to be lower given that physical assets held by banks are not usually held for income generating

purposes. The Industry’s ROA was pegged at 0.21% for the half year period to June 2012 with banks, Stanchart (2.31%),

Stanbic (1.74%), and BancABC (1.61%) NMB (1.35%) and FBC (1.29%) proving to be better off.

In Concluding

With the country still on a recovery quest that has seen growing resistance from both economic and political hurdles coupled with

lack of plausible support from the international community which has been for some time bedeviled by economic and political

atrocities of its own in its own back yard, economic recovery and restoration of business confidence, especially in banking sector will

depend on successful liquidity creation and continued stability of the political environment. While some have argued for merger of

small indigenous banks citing synergistic benefits and capitalization advantages, some believe a US$100 million capitalization

requirement in a US$12 billion dollar economy is somewhat stretching it. Despite the recent downgrade of economic growth

prospects from 9.4% to 5.6% we remain obstinate that the financial services sector will exhibit positive growth. Country risk will

remain the biggest hindrance to access to offshore lines of credit and the enforcement of the Indigenization and Economic

empowerment act also remains critical in determining the volume of foreign capital investment that will filter into the economy.

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Ranking

Institution

Total

Assets Institution Deposits Institution Loans & Advances Institution

Profit Before

Tax

1 CBZ 1,080,458,890 CBZ 958,834,612 CBZ 725,979,672 CBZ 17,701,072

2 BancABC 433,470,000 BancABC 381,948,000 BancABC 296,479,000 STAN CHART 11,051,122

3 STANBIC 392,086,000 STANBIC 336,466,000 STANBIC 266,628,000 STANBIC 10,028,000

4 STAN CHART 365,101,002 STAN CHART 282,576,004 FBC 156,423,668 BancABC 8,778,000

5 BARCLAYS 251,276,862 FBC 204,243,271 STAN CHART 125,803,443 FBC 3,838,341

6 FBC 240,013,753 BARCLAYS 202,866,373 ZB 110,846,555 ZB 3,390,003

7 ZB 237,088,078 ZB 192,840,004 KINGDOM 110,753,548 NMB 3,107,421

8 MBCA 192,058,650 MBCA 156,372,799 TN BANK 104,819,791 MBCA 2,834,422

9 METRO 184,260,474 KINGDOM 135,929,991 NMB 103,982,515 METRO 1,944,806

10 NMB 177,833,077 METRO 133,542,906 MBCA 98,679,317 TN BANK 1,267,690

11 KINGDOM 163,358,400 TN BANK 124,217,170 METRO 84,913,851 KINGDOM 855,648

12 TN BANK 147,359,147 NMB 116,793,837 AGRIBANK 77,994,204 BARCLAYS 831,272

13 AGRIBANK 110,286,911 AGRIBANK 81,152,339 ECOBANK 62,352,000 ECOBANK 47,000

14 ECOBANK 80,372,000 ECOBANK 63,242,000 BARCLAYS 59,283,879 ZABG (1,632,922)

15 TRUST 50,122,052 TRUST 27,453,060 TRUST 22,516,122 TRUST (2,177,174)

16 ZABG 40,049,944 ZABG 14,640,977 ZABG 5,149,104 AGRIBANK (2,426,574)

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Contacts

1 Disclaimer:

The views expressed in this document reflect the views of FBCH Securities Research based on the information available at the time of writing and as such, may change without notice. It

is provided for information purposes only and whilst reasonable steps have been taken in carefully preparing this document, no responsibility can be taken for any action based on information

contained herein. This document may not be reproduced, distributed or published by any recipient for any purposes without the authorization of FBCH.

FBC Securities (Pvt) Ltd

2nd Floor Bank Chambers,

76 Samora Machel Avenue,

P.O Box 1227, Harare, Zimbabwe

Tel: 263-04 -700373/700928/797765-67

Fax 263 -04 -704492

Website: www.fbc.co.zw

Managing Director- Ben Gasura- [email protected]

Front Office:

Richard - [email protected] 077 2 446 789

Manatsa- [email protected] 077 3 289 120

Davide- [email protected] 077 3 940 770

Research:

Yvonne - [email protected] 077 3 437 869

Martin – [email protected] 077 5 203 746

Albert – [email protected] 077 5 198 997

zimbabwe financial services sector analysis 30 june 2012

Economy & Finance