THE stock market this week continued with its seemingly inexorable plunge back to the 300 000 points level, a scenario which would see it fall to its lowest level since July 2 2003, when it closed at 302 831 points.
The industrial index closed on Wednesday at 332 092 points, which reflected a week-on-week decline of 4% and took the annual position to a 17% fall. Compared with the index’s all time high of 754 608, and this year’s highest close of 525 497, the index is down 60% and 42% respectively, as sentiment remains decidedly bearish towards equities.
The limitations surrounding speculative activity arising from the monetary policy statement, the uncertainty as regards the licensing of asset management companies and firming money market interest rates have all been cited as the reasons for the depressed stock market. The other major reason, of course, has been the sustainability of earnings going forward, in light of the changes in the operating environments for virtually all of industry and commerce.
This week we look at the year-end results of ABC, CBZ and NMB. The hugely disappointing results of the latter, which we shall look at first, certainly add credence to the doubts surrounding the growth of future earnings for the banking sector, and indeed all companies as a whole.
NMB for the first time since the year 2000 and going against the trend of preceding years, recorded a second half that was less profitable than the first.
Net interest income grew by just 138% to $44 billion, up from $18,5 billion in 2002, the bank having suffered, in contrast to some other institutions, from the high interest rates in the last quarter of 2003. The suspension of the bank’s forex trading licence clearly had a more drastic impact, on the revenues of the bank than had been admitted by management at the half-year results analysts briefing, with non-interest income up by only 260% to $8,9 billion.
Stunted revenue growth against an increase in operating expenditure of 331% to $16,8 billion saw the cost to income ratio weakening to 32% compared with 19% in the prior year. Provisioning levels further served to dilute earnings, going up 343% to $5,2 billion, and allied with a $475 million loss from the discontinued operation, stock broking outfit Continental Securities, the bottom line recorded growth of a paltry 69% to $16,1 billion. ABC’s performance for 2003 was even more disappointing, as the group’s now virtually annual non-recurring income statement debits continued to make a nuisance of themselves, together with the negative impact of currency movements on translating the various regional operations into consolidated accounts. Detailed accounts were done in the reporting currency, Botswana pula, where ABC has a primary listing. Thus a commentary will be made on the brief Zimbabwe dollar salient features analysis that was provided with the results.
Total income for the year was down 21% to $183 billion, largely due to a 36% pula decline in other income. This decline was attributed to capital constraints in Tanzania, the strengthening rand which limited forex volumes, and reduced arbitrage opportunities.
A deterioration of the cost to income ratio together with the aforementioned non-recurring and extraordinary items which amounted to BWP 37,1 million, mainly relating to provisions for retrenchments, a loss on the sale of the Mozambique leasing operation, bad debt write offs in Tanzania and the start up costs of UK based Iroko Financial Products, further worsened the group’s performance.
The end result was that attributable earnings of $4,3 billion were realised for the year, down from $60 billion in 2003. In pula terms, this translated to earnings of BWP21,9 million compared with BWP70,2 million.
The results of CBZ, certainly in comparison with the above two, would have made more pleasing reading for its shareholders.
Net interest income was up 616% to $43,1 billion, as the growth of its retail base benefitted the interest margin. Non-interest income at $19,6 billion was up 500%, driven essentially by the increase in fee and commission income from $2,6 billion in 2002 to $17,1 billion in 2003. Total income thus grew by 575% to $62,6 billion.
Operating expenditure, which included a provision for retrenchments of $4 billion, grew at a lesser pace than revenues, up 465% to $23,2 billion, and as a result the cost to income ratio improved to 37% from 44% the previous year. Provisions that were described as, “prudent rather than an indication of the quality of the book”, shot up almost 12-fold to $9,5 billion, and this restricted bottom line growth to 526%, from $2,7 billion to $16,9 billion.
While management at CBZ suggests that they should be able to continue producing consistent growth in earnings, the results of NMB, while perhaps exaggerating the problem, do raise question marks as to where financials will find the revenues to replace those that have been removed by the closure of a multitude of speculative windows. The inevitable return of banks to their core business, that is making money from margins between raising deposits and extending advances, as well as fees and commissions and other ancillary income, will thus continue to put pressure on cost to income ratios and profitability, as these activities realize margins far below the fantastic margins enjoyed in the heydays of parallel market transactions.
When it rains, it certainly seems to pour for the sector. But as the saying goes, “what doesn’t kill you only makes you stronger”.