Banking sector performance review

FBC Building Society reported a net surplus of US$8,5 million, representing 35% growth from FY15.

The banking sector registered a very strong performance in 2016, marked by a 16% increase in total assets and 37% increase in profit after tax.

Tinashe Kaduwo

Banks total assets grew by around US$1.1 billion from US$6,9 billion 2015 to US$8,1 billion in 2016 supported by more than 80% growth in Government securities and Real-Time Gross Settlement balances.

Aggregate profit after tax of US$175 million was 37% up from US$127 million realised in 2015.

Supporting strong profit growth were Treasury Bill holdings which boosted short-term earnings and increased transactional volumes in a cash-starved environment.

Generally, the sector registered encouraging progress in all key metrics such as deposit growth, non-performing loans ratios, return on equity and levels of capitalisation. Despite the sector enjoying huge progress, the growth has been disproportionate among individual banks as they employed different strategies in response to the difficult operating environment.

We take a look at some key performance aspects of operating banks ranked according to return on equity.

POSB

The savings bank, although ranked eighth in terms of profit size, scores a first in terms of both return on assets and return on equity. Profit after tax grew by 22% from US$7,9 million in 2015 to US$9,7 million in 2016 supported by an 8,1% jump in net operating income.

Its assets also registered strong growth of 23% highlighting the bank’s expansion strategy.

Deposits, in line with other financial institutions, rose by 22%, while loans fell by 10%. POSB seems to be on an aggressive growth strategy driven by deposit mobilisation, strategic partnerships and investment in digital platforms.

The bank introduced various new products in 2016 including mortgage financing, expansion of its money transfer agency business to include MoneyGram on top of Mukuru and Western Union, bill payments, partnerships with mobile network operators and various products targeted for farmers as well as microfinance loans. This helped diversify the bank’s income lines.

As such, non-interest income, particularly fees and commission income, was the major income driver due to the bank’s strong money transfer agency business and its wider branch and agency networks.

POSB won the “Most Comprehensive Agent Banking Award” at the Inaugural Agent Banking & Digital Financial Services Awards 2016 by Mtilikwe Financial Services, highlighting its strong presence in that line of business.

Partnerships with money transfer agents and mobile services providers seem to be a strategy working well for the bank given the country’s reliance on remittances.

The bank, which is well capitalised with tier 1 capital at US$40,5 million, is increasing its investments in technology-driven platforms, which will save costs and improve and sustain its earnings. The bank has an exciting business model which helps sustain its performance.

CABS

The largest mortgage lender scored a first in terms of profit size at US$39,2 million up from US$28,4 million in 2015. Although ranked second in terms of return on equity and third on return on assets, Cabs enjoyed solid growth over the years.

Operating income at US$99,5 million was 19% above 2015 income of US$83 million driven by growth in non-funded income and a huge fall in provisions. Provisions went down due to recoveries of non-performing loans.

Net interest income was almost flat despite a 3,7% growth in the loan book, highlighting the effects of reduced lending rates. Cabs bucked the market trend, growing its loan book and increasing its share to 18%.

Other banks generally slowed on lending in response to the operating environment. Cabs, riding on its parent Old Mutual Group, has over the years been a dominant player mainly in offering mortgages and has attracted a huge pool of civil servants among other home seekers. The financial institution enjoys market leadership in the mortgage business space and is also at the forefront of product innovations in the banking sector.

Cabs enjoys technological and skills transfer from a bigger and stronger parent which will continue to improve and cement its competitiveness in the local market. The bank seems to be focussing more on transactional business due to its huge investments in transactional channels such as point-of-sale, mobile banking and remittance platforms. Old Mutual’s one-stop zones (Green Zones) and various initiatives from both Old Mutual and Cabs are expected to help sustain income growth.

FBC Building Society

FBC Building Society is one of the most efficient banks with the least cost-to-income ratio in the sector. The financial institution ranks third in terms of return on equity and second on return on assets.

With after-tax profit of US$8,5 million representing 35% growth from the US$6,3 million achieved in 2015, the mortgage lender has shown strong and consistent growth over the years. Total assets grew by 18,4% in 2016, deposits by 13,6%, while loans remained stagnant. Its efficiency together with the falling cost of funds and generally good turnover in its housing units sales have been the major driver to its resilient performance. Given the country’s housing backlog and FBC’s efficiency in the space, the mortgage lender is expected to continue registering encouraging performance.

Stanbic Bank

Stanbic, although taking an 11% knock on profit after tax to US$21,2 million in 2016 from US$23,9 million in 2015, is one of only two banks that have never suffered a loss since the advent of the multi-currency system. This highlights consistent performance.

In 2016, its net operating income went up by 7,9%, driven by solid growth in net interest income and foreign currency dealing income. Net interest income was supported by growth in loans, an insignificant cost of funds and acquisition of short-term investments which include Treasury Bills and Aftrade bonds. However, the bank took a knock on fees and commission due to a decrease in the volume of cash transactions. Despite all that, Stanbic ranks second only to Cabs in terms of profit after tax.

The bank enjoys a huge share of the corporate customer base, good quality assets as evidenced by a non-performing loan (NPL) ratio of 5% and an insignificant cost of funds which helps defend its margins in light of the RBZ’s directive to lower lending rates. A huge corporate customer base, insignificant cost of funds and its regional presence through Standard Bank puts Stanbic on a stronger footing when compared to its local peers. Standard Bank is the largest pan-African bank in terms of balance sheet size.

FBC Bank

FBC Bank ranks fifth in terms of return on equity and sixth in terms of overall profit after tax of US$10,6 million. The BBB+ rated bank managed to grow its assets by 21% with deposits growing by 17%, while loans dropping 2%.

In 2016, operating income at US$41,3 million was 13% above 2015 income of US$36,5 milion, driven by growth in both funded and non-funded income. With reduced lending rates and stagnant loan book, net interest income received a boost from earned Treasury Bill discounts in the secondary market.

However, a 214% increase in provisions from US$2,1 million in 2015 to US$6,5 million in 2017 negatively impacted on the net contribution of the funded income line.

The fees and commission income line benefitted from cash withdrawal caps and increased transaction volumes, to be the major driver of operating income. The bank is among the pioneers in the e-commerce business and has around 270 000 subscriptions on its mobile banking platform and as such enjoys a good share of transactional business among individual clients.

Both the bank and the building society performed well, showing the strength of the FBC Holdings brand.

Among local banks, FBC has been the major contributor in terms of access to foreign funding through lines of credit. FBC Bank and the Building Society enjoy a good share in the banking space and are key players in providing commercial banking and mortgages.

Ecobank

Ecobank, a local unit of Africa’s largest bank in terms of geographical dispersion, is among the top performing banks in terms of both return on assets and return on equity. The bank managed to grow its after-tax profit by 91% from US$5,2 million in 2015 to US$9,9 million in 2016.

Ranked fourth in terms of return on assets and seventh in terms of overall profit, performance was a result of 14,1% growth in net interest income after provisions on the back of improved asset quality and a fall in the cost of funds from 2,9% in 2015 to 1,6% in 2016.

Interest income was the main income driver and the bank has the least NPL ratio in the sector.

Fees and commission income jumped by 23%, driven by increased transaction volumes and profitable trade finance portfolio.

Increased foreign currency dealing activity also boosted non-funded income as more importers turned to ZAR and EUR payments to manage countrywide USD shortages. With its spread across 35 African countries, Ecobank is positioned to play a bigger role in facilitating Zimbabwe’s growing trade links within Southern Africa as well as East Africa.

The bank continues to introduce new innovative trade and commodity finance solutions which help unlock new income lines and cement its position and presence in the local banking space.

Its strategy of refocussing away from the traditional brick-and-mortar banking model to lower cost digital channels in light of the current cash squeeze seem to be bearing positive results. The bank registered great performance and its dominance and market share are likely to continue growing, riding on its strong regional presence.

Barclays

Barclays follows on the list in terms of return on equity. With after-tax profit of US$10,8 million, Barclays ranks fifth in terms of overall profit, seventh on return on equity and eighth on return on assets.

The bank, which has been operating in the country for more than a century, enjoyed a 27,7% growth in operating income in 2016 driven by growth in all income lines and recoveries.

Treasury Bills discounting compensated loss in income from conservative lending activities to drive net interest income, given Barclays’s safe banking model approach. Barclays was the first bank to introduce weekly cash withdrawal limits.

Having the much-demanded United States dollar, as well as increased transaction volumes boosted its fees and commission income. The bank, which has enjoyed huge support from its parent Barclays Plc, will face an acid test as its parent exits Africa.

Standard Chartered

The past year, 2016, has not been a good year for Standard Chartered with total operating income falling by 13,3% due to a drop in both interest income and commission income. Interest income was affected by the bank’s prudent lending strategy which resulted in a fall in its loan book.

Fees and commission income took a knock due to cash shortages. Foreign exchange dealing income, although slightly going up in 2016 when compared to 2015, was below previous years’ trends.

However, the bank managed to grow its after-tax profit from US$0,4 million in 2015 to US$13,4 million in 2016 due to cost savings.

While most banks benefitted from increased transactional volumes resulting in a jump in fees and commission income, Standard Chartered took a knock, highlighting a low level of transactional business. This is a worrying trend from a bank that has been operating in Zimbabwe for over a century. Its conservative lending approach has affected asset creation and will continue to depress funded income growth.

MBCA

Profit after tax of US$5,7 million was slightly below the US$5,8 million enjoyed in 2015. The bank performed fairly well in terms of return on equity and return on assets but is far below its international peers. Total assets jumped 22,5% in 2016 in line with market trends.

The bank’s strategic deposit mobilisation initiatives and cash squeeze resulted in a 22,5% growth in deposits. The local unit of South Africa’s Nedbank Group has over the years been a dominant player, especially in the tobacco industry, leveraging on its ability to mobilise cheaper lines of credit. Riding on Nedbank, MBCA is likely to register rapid growth going forward. The “A” rated bank will continue to enjoy technological and skills transfer from a bigger and stronger parent which will improve its competitiveness in the local market.

Agribank

The agricultural-focussed bank follows the list due to its massive turnaround. For the first time since dollarisation, the bank moved out of the red, recording a profit of US$4.8 million. Agribank continued with its rebound which began in 2015 after implementation of various initiatives to boost income and profitability.

Following its capitalisation in 2015, the bank implemented various initiatives which include mobile banking, new technology-driven products, and microfinance among others. As such, the agricultural-focussed bank realised a 37.2% jump in operating income, driven by a 51.3% jump in net interest income after provisions.

Net interest income grew despite a 12.7% fall in the loan book, highlighting the quality of interest- earning assets in the bank’s portfolio. The bank is the biggest financier of smallholder sugarcane farmers in Chiredzi and is at the core of agricultural development.

It is among the top 5 banks in terms of share of funded income. Fees and commission income, which used to be the major income driver before 2015, was flat in 2016, an area the bank is intent on improving.

The bank reportedly partnered Save the Children Foundation in providing microfinance services to rural areas. It is also opening Green Markets in agricultural produce markets such as Mbare Musika to offer microfinance services to farmers.

All these initiatives are expected to bear good returns in the future. However, the bank has to take precaution on NPLs which may its efforts. Generally, the bank registered a massive turn around and continued implementation of the government agricultural-focussed policies through Agribank will help sustain income growth.


ZB Bank

ZB Bank registered a massive growth in profit after tax from US$3 million in 2015 to US$7.9 million in 2016. The growth was supported by a 15.8% jump in operating income.

Treasury Bills discounting compensated loss in income from reduced lending activities to drive net interest income.

Fees and commission income growth was driven by increased transaction volumes on the back of the prevailing cash-lite environment and ZB Bank’s investment in technology.

The bank has been at the forefront of technology-driven banking products such as its ZB Pauri Khonapho card and agency banking model.

With US sanctions chocking its competitiveness in terms of funded income, the bank invested heavily in technology to boost non-funded income. Solutions such as real-time prepaid electricity payments, DStv payments, strong mobile banking app and synergies with mobile telecoms operators saw ZB relying on fees and commissions as major income drivers.

Given the lifting of US sanctions, the bank can now unlock other lines of business. The bank reported that it has acquired new correspondent banking relationships with US$, ZAR and GBP transactions now sailing through.

CBZ

Although scoring third in terms of overall profit at US$18.7 million, CBZ ranks lowly in terms of both return on equity and return on assets. 2016 was not a good year for the country’s largest lender.

Total operating income at US$98.7 million was 16% below 2015 income and net interest income after provisions which peaked US$81.9 million in 2012, was under pressure due to a conservative loan book and regulated interest rates.

The bank enjoyed strong growth in fees and commission income, benefitting from the cash-lite environment. The bank is among banks with high cost funds, eating into its interest margins. Despite enjoying the relative advantage of size over other banks, CBZ largely comes short on leveraging its sheer asset base to maximise both return and quality of its assets.

The bank is also highly exposed to government as it holds a huge share of sovereign paper. CBZ positively has been investing in its transactional platforms with its mobile banking voted among the best. The bank is also making inroads in mortgage financing and harnessing diaspora remittances. Together with Stanbic, the bank has never suffered a loss since dollarisation.

NMB

The bank took a 9% knock in after-tax profit to US$5 million due to underperformance of its income line, resulting in earnings per share falling from 1.43 cents in 2015 to 1.32 cents in 2016. Whilst the industry has capitalised on cash challenges and macroeconomic trends, NMB seems to be lagging behind the market.

Operating income fell 7.1% to US$32.4m from US$34.8m in 2015 due to a 25.6% decline in noninterest income.

Despite a marketwide increase in transaction volumes which boosted the industry fees and commission income, NMB’s fees and commission income fell sharply by 28%, highlighting the bank’s low or declining level of transactional business.

Its NPLs are still relatively high when compared to the market average and international benchmarks. A 6% drop in deposits when the market is realising should be an area of concern for the bank. The bank seems to be changing its strategy which was traditionally driven by asset creation.

Steward

Steward Bank enjoyed a 13.7% growth in after-tax profit to US$6.2 million from US$5.4 million in 2015. Total assets jumped 34%, deposits rose 51% whilst loans slowed by 8%. Profit growth was driven by a 49% jump in non-interest income as the bank has invested heavily in transactional platforms supported by its parent Econet.

The bank scooped various awards in 2016, highlighting its performance. However, the financial institution still ranks lowly in terms of return on equity, only ahead of ZB Building Society, BancABC and Metbank but fifth in terms of return on assets, highlighting its low asset footing. With its focus on technology-driven solutions, the bank is positioned to capitalise and benefit from the ongoing macroeconomic conditions.

ZB Building Society

The building society was one of the major contributors to ZBFH profitability. However, macroeconomic challenges have grossly affected its performance.

The building society is among financial institutions with the worst return on equity and return on assets, only ahead of BancABC and Metbank.

After-tax profit was US$0.9 million, down from US$1.4 million enjoyed in 2015. The building society is also undercapitalised. Total assets have stagnated whilst both loans and deposits are weakening.

BancABC

BancABC has lost its position among the banking giants in the country, registering an after-tax profit of US$1.8 million down from the US$2.4 million enjoyed in 2015.

The bank is the second worst performing bank in terms of return on equity and the worst in terms of return on assets. In 2016, operating income fell by 13.3% as all income lines underperformed. Net interest income after provisions was affected by the bank’s reduced appetite for lending, deteriorating asset quality and impact of reduced or controlled lending rates.

Fees and commission took a knock due to regulatory directive to reduce bank charges. Industry-wide, most banks benefitted from increased transactional volumes which more than offset the impact of lower bank charges.

However, relatively weaker transactional infrastructure saw the bank taking a knock in fees and commission income. The bank was the only bank that registered a negative growth in total assets, loans and deposits.

All operating banks generally experienced growth in total assets and deposits, benefitting from cash and foreign payments challenges which limited withdrawals. The bank positively is investing in its e-channels and other transactional platforms that may help mobilise deposits and boost the non-funded income line in the future.

Metbank

Metbank, with a 2016 profit of US$0.7 million up from US$0.3 million in 2015 is at the bottom in terms of overall profit ranking and return on equity but is ahead of BancABC in terms of return on assets.

The bank is relying more on recoveries of NPLs and has made significant progress in resolving its NPLs.

However, its balance sheet remains illiquid with the majority of assets stashed in fixed assets. Given an illiquid balance sheet and strong economic headwinds the sector is facing, Metbank’s woes are not yet over and more has to be done to bring the bank back into sustainable operations.

Conclusion

Generally, the sector performed well above expectations and has made progress in key metrics such as NPLs, capitalisation, asset and deposit growth.

The sector generally capitalised on Treasury Bill discounting to boost short-term earnings, which questions the sustainability of the strategy. Cash challenges have boosted deposits which have remained idle given limited quality borrowing clients. As such, deposits are building up more costs for banks as these banks are not able to lend this money out.

Therefore, banks are implementing various strategies to remain profitable and preserve shareholder value.


Kaduwo is an economist. Email kaduwot@gmail.co
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