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Large balance sheets and questionable earnings

Kumbirai Makwembere

THE 2012 June reporting season got under way last week at a time bankers across the globe were in a tight spot. In the international markets, bankers are still viewed negatively as it is widely believed they caused the subprime mortgage crisis. As if that was not enough, bosses of some of the failed institutions walked away with hefty bonuses as golden handshakes.


Recent allegations of fixing of the libor rate by big banks such as Barclays have not helped the banks’ cause. In the past week, Standard Chartered was also accused of money laundering activities in Iran.
Locally, bankers are also in a tight spot, though for different reasons. The central bank is of the opinion that bank charges being levied locally are too high. Banks are again accused of paying very low rates on deposits while on the other hand charging exorbitant interest rates on loans. Added to this, the central bank recently revised upwards the minimum capital requirements for financial institutions. Commercial and merchant banks are now required to have US$100 million as capital from US$12.5 million and US$10 million, respectively, a level many people feel is unrealistic.
It is amid all this chaos that Barclays and CBZ released their financials for the half year to June 30 2012. Results from these two institutions are interesting in that these are the two largest banks in Zimbabwe, when assessed by market capitalisation. They are both listed on the local bourse but have contrasting approaches to banking. On many occasions, market analysts have debated over which counter one should be exposed to. Barclays maintains what it terms a cautious approach to banking in terms of which it is very conservative in its lending approach whilst CBZH has been aggressive in issuing loans since the onset of the multicurrency regime. Management at CBZH believe that a loan should be advanced so long as the underlying collateral covers it.
Performance of the two banks in the six months to June 30 2012 was not surprising. Earnings attributable to shareholders for Barclays Bank Zimbabwe came in at US$471 433, a decline of 36% from June 2011 levels. Total income for the bank was US$17,5 million, with non-funded income raking in US$13.5 million. Total loans to customers amounted to US$59,2 million against deposits of US$202,8 million, giving a loan to deposits ratio of 29,2%.
CBZH, on the other hand, managed to grow earnings attributable to shareholders by 34,2% to US$18,3 million. Total income for the group increased by 16,8% to US$64 million from the US$54,8 million recorded last year. Net interest income brought in US$41,4 million, which translated to 64,7% of the group’s total income. The balance sheet size stood at US$1,2 billion as at June 30 2012. Loans and advances amounted to US$790 million against total deposits of US$985,7 million, giving a loan to deposits ratio of 80%.
At first glance one can quickly recommend CBZH ahead of Barclays. The main attraction of CBZH is the company’s profitability. Management at CBZH have to be commended for maximising on the use of deposits at their disposal. The advantage that CBZH has over other banks is access to deposits from government departments, amongst them the Zimbabwe Revenue Authority. This has seen the contribution of interest income exceeding that of non-interest income unlike in other banks. But can the profits that CBZH is generating be relied on? A lot of questions have been asked with regards to the level of provisions for non-performing loans. In the six months under review, total non-performing loans amounted to US$44,7 million, which is just 5,7% of the loans in issue. We feel that this level is very low in relation to the high rate of non-performing loans in the economy. It is widely suspected that banks are not declaring their bad loans by simply rolling over loans that will be due.
The Barclays approach, on the other hand, seems to be yielding fruit as the high rate of non-performing loans in the economy is now weighing negatively on the performance of banks that were aggressive in their lending approach, CBZH included. Ideally, institutions that were aggressive in their lending now have to provide for the bad loans, something they are not doing. This casts some doubt on whether the super profits which they claim to be recording are real. It is no secret Barclays has not been generating significant profits for its shareholders since dollarisation. However, one can not dispute the fact that management has maintained their assets in a quality state. CBZH now has a balance sheet size of US$1,2 billion, with loans and advances of US$790 million being the main component. Yes, the balance sheet size has grown but are the assets performing?
Market players have been put off by the Barclays’ approach which they now term a lackadaisical approach to banking. It is widely believed that local management is under instruction from the holding company to keep the business in ‘care and maintenance’ mode until local operating conditions improve.
The holding company will provide financial aid whenever required as was the case in 2010 and 2011. Barclays Bank Zimbabwe got a total of US$14 million for use in their retrenchment exercise. It is again widely expected that the current stance is to help manage the hype towards the bank as the government implements the indigenisation and economic empowerment.
It would now appear that the market no longer believes the CBZH story, as evidenced by the trend in the share price.
The Barclays share price, on the other hand, has been stagnant owing to its profits that are below market expectations. So should investors go for a bank with a large asset base and questionable earnings or for a bank generating small profits but with a good asset quality?


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