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At The Market With Tetrad

Market still banking on financials’ success?

By Brian K Mugabe

HAVING seemingly broken out of their collective shells and undergone a long overdue re-rating by investors, the listed b

anking counters then experienced a loss of confidence by the market as NMB had its forex licence summarily suspended by the central bank for a period of one year for purportedly flouting exchange control regulations.

Having rallied to their respective all time highs, the banks have subsequently come off. Concerns over sustainability of earnings, the general instability of the economy to which banks are lenders and the crackdown by the authorities, have all played a major role in reinforcing the uncertainty surrounding the sector.

While the concerns are genuine, the massive increase in bank charges since the advent of the cash crisis began, (many of my colleagues have of late been voicing complaints about monthly charges of $25 000 and beyond up from $5 000!), suggest that, for commercial banks at least, earnings are not likely to slow down significantly.

All the listed banks have now reported their results and this week we take a brief look at the final batch – those of Barclays, the CBZ, First Bank and NMB.

Multinational Barclays produced a solid performance for the half-year to June. Courtesy of the banks’ huge low-cost retail deposit base, net interest income of $16 billion was earned and while the net interest margin came off slightly from 85% to 84%, it still remained significantly higher than its listed peers.

Net fee and commission income went up 193% to $7,8 billion while net foreign currency trading income went up an impressive 807% to $2,2 billion.

Total operating income was $26,6 billion for the half-year compared with $7,4 billion at interim 2002. Operating expenses were kept below the rate of inflation increasing by 222% to $10,9 billion. The cost to income ratio improved to 41% from 46%, highlighting the success of the group’s ongoing rationalisation.

The charge for doubtful debts was down 30% to $384 million, a decline attributed to significant recoveries and a reduced number of new accounts being classified as bad and doubtful. After accounting for taxation, attributable earnings of $10,2 billion were attained, an increase of 414%.

CBZ’s results while good, proved to be below market expectations.

Net interest income grew by 230% to $6,7 billion as the net interest margin came off 10% to 35%. Given the size of the bank’s deposit base the net interest margin remains disappointing when compared with the likes of Barclays and indeed some of the newer players.

Non-interest income was up 304% to $3,7 billion, driven by commission and fee income which contributed $3,2 billion of that total and was up 529% on first half 2002.

Trading income which included foreign currency trading revenues was up marginally from $349 million to $357 million, the bank being of the opinion that this reflected the sustainability of its earnings going forward as this income stream was not heavily relied upon. Total income grew 253% to $10,3 billion.

Operating expenditure growth was well-managed to just 204%, giving a figure of $4,3 billion and the cost to income ratio improved to 41% from 48%.

Net operating income of $6,1 billion was attained, up 297% on 2002.

The bank continued with its conservative provisioning policy and this saw the charge to the income statement increasing by 172% to $784 million.

Operating profits after provisions of $5,3 billion were recorded went up 326%. Attributable earnings for the period came out at $3,3 billion which was 312% up on interim 2002 and 22% up on the full year to December 2002.

First Bank’s results on the other hand were certainly ahead of analysts’ forecasts. Net interest income growth was disappointing, up just 45% to $977 million as the net interest margin came of significantly from 37% to just 11%.

This poor treasury performance was attributed to the fact that the bank held a large portfolio of Grain Marketing Board Bills which are only repriced on maturity or roll-over and the bank thus took a significant knock when rates firmed.

Conversely, fees and commission income and trading profit experienced a spectacular rise up 1 664% to $7,9 billion. This was mainly as a result of increased contributions from the investment banking division and the jump in foreign exchange income from $52 million to $1,4 billion.

The bad and doubtful debts provision charge at $73 million remained imprudently low in my opinion, with total provisions as a percentage of the loan book more than halving to 2%. Operating expenses were up 305% to $2,4 billion and the cost to income ratio improved significantly to 28% from 51%.

Attributable earnings of $4,2 billion were attained, representing an impressive growth rate of 1 123%.

Lastly we look at NMB’s half-year results. Net interest income of $10,9 billion was attained for the period, an increase of 375% on interim 2002, with the net interest margin roughly unchanged at 55%.

Other income surged 538% to $8,8 billion buoyed by a strong net dealing and “other” income performance, the latter incorporating forex trading revenues. Net operating income of $19,7 billion was recorded.

Operating expenses were up 412% to $4,6 billion and the cost to income ratio improved from 23% from 25% last year. Bad debts provisions were up significantly from $62 million to $1,8 billion, an increase attributed to the “harsh economic environment”.

Attributable earnings of $9,2 billion were achieved representing growth of 587% on 2002. Naturally, concerns were raised at the bank’s ability to perform as well as it has done historically given the suspension of its foreign currency licence, but management was of the opinion that they would find other ways of growing profitability while appealing against the suspension in the meantime.

It will be interesting to see what strategies the bank employs to circumvent this setback come its year end results.

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