Caution: Barclays’ approach to banking

BARCLAYS Zimbabwe Ltd became the first bank in the country to announce its full year 2009 financial results.

Ironically, the presentation to analysts and the media was done on Monday, the very day when the contentious Indigenisation and Economic Empowerment regulations became effective.
The regulations require companies to submit registers of shareholders to the minister responsible for the Act. Companies with less than 51% shareholding in the hands of indigenous people will be expected to outline plans for compliance within five years.
Given its size, Barclays is one of the companies in the country whose reactions to the new policy will be closely monitored. 
So far the company has pledged to “continue to abide by the laws and regulations of the country” and this should excite the hawks who could be eyeing the bank as a prime target for indigenisation. At least 20% of Barclays’ shareholding will need to be ceded to local people.
If the sale is forcibly done, the parent company has options to comply with or to withdraw its franchise. Should it exercise the second option, shareholders of what today constitutes Barclays Zimbabwe’s operations could lose significant value because the franchise is at present arguably the most valuable asset the company possesses.
Although it has inferior operating ratings — profits, deposits, asset base — compared with CBZ, as at March 2 Barclays Zimbabwe had a US$56 million greater market capitalisation than the latter.
That difference can be taken as the minimum value of the goodwill of the Barclays brand. Down the pecking order of the banking sector ABC had a market capitalisation of US$22 million; for FBC it was US$14,5 million; while that of CFX was US$1,89 million. NMB and ZB had market values of US$13 million and US$12,7million, respectively.
The median market capitalisation in the sector is US$14,5 million with an arithmetic mean of US$50 million.
This could be construed to mean that most of the value in Barclays Zimbabwe today comes from its parent company rather than from local physical assets. Taking the goodwill away, what will be left may not be worth US$30 million if the market values of other banks on the ZSE are used as a benchmark. More value can be realised if the bank complies voluntarily than when forced.  If that is true for Barclays then it should also be correct for most of the transnational companies. 
Back to the financial statements, the bank did not disclose anything new to the market.
The environment, though much better than during hyperinflation, remains untenable. Banks are faced with choosing between growing the loan books and minimising default risk.
For Barclays and indeed all the traditional banks the choice is simple: limit loans to what can reasonably be considered collectable. Out of deposits of US$122 million only US$20,3 million was given out as loans. The bank did not incur any direct impairment outside the minimum charge required by the central bank, thanks to its preference for quality rather than quantity. US$324 000 that could not be settled in the Zimdollar era was recovered in 2009 as the borrowers’ cash flows stabilised in the US dollar environment. Some of the more aggressive banks, by contrast, have had to reschedule their loans after borrowers failed to settle on due dates.
The small loan book led to an equally petite net interest income of only $1million. Non-funded income of $16,3 million boosted total revenue to US$17,8 million following an improvement in transaction volumes from September.
Security fears after a spate of armed robberies rather than burgeoning public confidence in banks are largely responsible for the increase in the volume of transactions. While a 92% contribution of non-interest to total income is too high by any measure, managing director George Guvamatanga believes that the future of banking lies in non-funded revenue and not interest, which could be true.
Barclays used 96,6% of the total revenue to pay for operating expenses leaving pre-tax profit at US$611 382. Staff costs constituted 56,5% of the expense bill despite shedding the head count from 1 205 to 930.
Labour costs in the economy jumped when multiple foreign currencies were formally accepted as money in the country because employees started demanding regionally competitive remuneration.  The remaining 44% of costs were other administrative expenses such as information technology, repairs, maintenance and depreciation. 
The ingredients for growing earnings are there but the environment may not yet be fully conducive. Bank deposits could increase in line with the market trend while loans can easily be ramped up using the deposits. Capital adequacy is high at 39% against the required 10%.
The bank is now compliant with the March 31 deadline for capital of US$12,5 million. Most of its assets are cash and cash equivalents with a liquidity ratio of 80% compared with an RBZ minimum of 10%. This means that the bank can easily meet its payment obligations when they fall due and can replace funds as they are withdrawn. All this potential only awaits the right moment to be unlocked.
As long as the bank can still cover its operating expenses from transactional charges there could be less pressure on Guvamatanga from his bosses in London to grow the earnings. The indigenisation policy could promptly calls for even more caution. This might mean that investors who are buying Barclays Zimbabwe shares may have to wait a little longer before they start seeing meaningful growth in earnings, let alone getting a dividend.

Ranga Makwata

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