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At The Market with Tetrad

It’s not as easy as ABC for Century

By Brian K Mugabe

CONTRARY to the widely held perception, it’s not all peaches and cream for the financial services sector as interim results to Ju

ne released by ABC and Century have shown.

Starting with the established regional player ABC, the group for the first time experienced materially the potential hazards of foreign market forays as it failed to turn around its leasing operation in Mozambique.

Looking at the Zimbabwe dollar “convenience conversion” accounts, total income was up 544% to $41,2 billion. This was driven mainly by non-funded income which contributed 74% to revenue as interest income actually shrank by the same percentage when compared to the same period last year, the latter to some degree a function of a sub-optimal Zimbabwe balance sheet structure in the first quarter of the year, given the upward movement in interest rates experienced during that period.

Operating expenditure experienced a huge jump, surging up 842% to $32 billion and resulting in the cost to income ratio deteriorating from 53% to 78%. This rise was attributed to increased information technology spent and greater investment in intellectual capital particularly in the region. The relocation of key head office staff to Johannesburg from Harare during the period no doubt also contributed to the significantly higher cost structure of the group. As a result, net operating income growth was diluted to just 207%, recording a $9,2 billion return.

As intimated above, the losses at the leasing operation in Mozambique resulted in a $636 million charge being taken, while a loss on disposal of $9,3 billion was accounted for as an exceptional item.

This charge, together with that for taxation, saw the group record a disappointing attributable loss for the period of $2 billion.

The balance sheet on the other hand grew at a reasonably pleasing rate, like its peers Trust and Kingdom, more than doubling from the year end position to close the half at $689 billion, reflecting the underlying strength of the group in spite of the poor earnings performance. This performance reflected the perils of generating the bulk of one’s income in a country whose currency is falling precipitously.

This scenario, which saw the income statement for the Zimbabwean subsidiary being translated at a closing rate of $507: BWP1 compared with a rate of $77: BWP1 at interim 2002, had a large negative impact on the earnings recorded in the primary pula reporting currency, without excusing the clearly unsustainable rise in expenses and the delay in offloading the poorly performing leasing operation.

While the results of ABC proved unexpectedly disappointing, those of Century were expectedly so.

Comparing the six months to June this year with the nine months to June reported in 2002 because of a change in the financial year-end, net interest income was up a meagre 62% to $915 million, reflecting a net interest margin of just 12% against 21% last year.

While the retail bank’s margins were roughly in line with last year’s, a negative interest margin from the discount house, indicative of a woefully structured book, 10% lower margins at LCZ and the massive rise in head office borrowings from $418 million to $3,2 billion were responsible for the margin deterioration.

Non-interest income at $3,5 billion grew at more favourable pace of 243%, dominated by gains in fee and commission income and dealing in securities and foreign currency. The net effect was that total income of $4,4 billion was generated, compared with $1,6 billion.

Growth in operating expenses of 155% was commendably kept below inflation and the cost to income ratio improved to a still high 68% from 74%. Bad and doubtful debts provisions were up almost three-fold to $114 million.

While the sale of Century Discount House received the necessary approvals from shareholders, the booking of the profit on disposal to the income statement while regulatory approval had not been granted seems imprudent to me, given that it is contingent upon this approval being given. Nevertheless, the group deemed it fit to recognise the $1 billion “gain on discontinuance”, and this had the effect of boosting bottom line earnings to $1,6 billion, a 414% hike on the nine months to June 2002.

The balance sheet, despite the hyperinflationary environment, grew by only 23% to $48,6 million since December, while deposits growth at just 10% is even harder to comprehend.

A pitiable core earnings performance for the group then, which although experiencing improvements in some areas, continued to lag not only inflation but also its peers, by a wide margin and then some.

I for one will be observing the results of Century’s impending rights offer with interest.

The two listed short term insurance companies NicozDiamond and Zimnat Lion, both the result of mergers, recently published their six month results to June.

The former released the more pleasing set. Zimnat Lion’s results while steady, were rather uninspiring, falling in line with expectations. Although these results have not matched others reported on in recent weeks, the runaway train that is the industrial index has continued to surge upwards, breaking through the 700 000 mark this week.

And so far, there seems to be no stopping it.

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