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ABC: so far so good

Collins Rudzuna
ABC Holdings’ latest interim results were released last week hot on the heels of the completion of their capital-raising exercise.  The rights issue was fully underwritten by major shareholder ADC Financial Services & Corporate Development Limited (ADC) and 50% of the shares offered were subscribed, the balance being taken up by the underwriter.


ADC, a fund focused on sub Saharan Africa financial markets, now owns 42% of the regional financial institution. Of the total US$50 million raised, US$15 million will be used to recapitalise the Zimbabwe operations.


Now that the topical issue of capital-raising has effectively been put out of the way, focus is now on the banking group’s performance for the half year.

The group’s financials were good.  Net interest income increased by 29% to US$32,5 million and the growth in non-interest income was even better at 43% to US$31,7 million. Operating expenses were however also on the rise driven by the retail banking branch rollout costs.


These increased by 37% to US$51 million, pushing the cost to income ratio to 80% from 78%. Once the rollout is complete, management expects a reduction in the ratio to 50% in 2013. Group deposits grew 25% to US$1,2 billion whilst loans went up by a more aggressive 66% to US$1 billion. As a result, the loans to deposits ratio increased from 67% to 89%. By most financial measures it would be fair to say things are going well for ABC, save for the burgeoning operating costs which, according to management, should be reduced anyway.

While at consolidated level ABC seems to be performing to satisfaction, results from the group’s different locales in Africa require further scrutiny. Segmental results show that Zimbabwe still dominates group results despite the country being just three years out of a prolonged economic downturn. Zimbabwe operations contributed US$25,7 million or 39% of total group income.


The proportion of its contribution was even more pronounced in the bottom line where it put in US$6,7 million or 45% of group profits despite accounting for just 32% of group assets. Growth in the Zimbabwe unit was achieved despite a market-wide liquidity crunch.

Botswana was the next most significant contributor, raking in 22% of group income. The country’s contribution grew significantly from 17% in the comparable period last year. Growth was driven by an increase in consumer lending and group scheme loans. Additionally, there was a clean-up of the loan book, which resulted in a reduction of the proportion of non-performing loans to 1,8% from 5,9%. A 64% increase in non-interest income, driven by foreign currency trading income and transactional charges from the lending side, also contributed to growth. Botswana’s US$4,8 million profit equated to 32% of group profits.

Zambia, which accounts for 11% of group assets, had total income of US$10,8 million and a profit of US$2.3 million. Mozambique was also profitable by US$1,9 million despite costs related to an increase in the span of activity, particularly expansion into retail. Operations in the country benefited from declining interest rates which improved the cost of funds and improved margins. Tanzania was the only loss-making unit.


Losses were attributed to a reduction in interest income and high loan impairments. Impairments came down by 13% from the previous year, but at US$1,3 million, were still significant. Management indicated that they were managing the situation closely. Non-interest income in Tanzania was also depressed, declining by 12% due to lower bond trading.

Based on ABC Holdings’ results discussed above it appears the regional expansion has paid off. Zimbabwe, however, remains the single most dominant contributor to the group, thus begging the question, would ABC be more profitable if they had put all the capital they deployed in the region into Zimbabwe instead. With all group capital deployed in Zimbabwe, ABC would be the biggest bank in the country. If at that size they could match current performance metrics, then the group would be an even more formidable force.

Even with the group constituted as it is currently, a significant improvement in the economy may see Zimbabwe operations dwarfing others in the region.


Justifying the existence of the regional operations may then be difficult. There are, however, points which justify regional expansion. Diversification is perhaps the key consideration amongst these. Having operations in different countries shields the group from total devastation in the event that things take a turn for the worse in one particular country.


We in Zimbabwe would understand this more than others given our experiences during the economic downturn. Another reason in support of regional expansion is access to growing markets. Countries like Mozambique are widely touted as hotbeds of growth potential and given our geographical proximity we are well-placed to take advantage ahead of well-heeled investors from beyond the continent.

However, inherently higher risks and unfamiliar operating conditions in  other economies counterbalance the diversification and other benefits for those banks brave enough to embark on the regional adventures. A case in point are the problems that were experienced by ABC in Tanzania. In the past, management has conceded that part of the problem was that there was just no culture of paying back loans in that country.  So, assuming the same operating model that worked for ABC in other countries was used there, the difficulties with high non-performing loans just prove that some regions are best left to those who know them best.


It is also difficult for banks to build critical mass in foreign lands without injecting huge amounts of capital. It would likely take years for new players to eventually be first tier banks. In the meantime, they would have to contend with being smaller and more vulnerable. The limited success of others like Kingdom in Botswana, who have also ventured into the region, seems to support this view.

Another emerging challenge for regional operators is the trend where central banks across Africa are increasing minimum capital requirements for banks. Some countries like Zambia even have capital requirements for non-local banks that are five times higher than those for locally-owned banks. African countries that have recently increased capital requirements for banks are Ghana, Zambia, and most recently, Zimbabwe.


A bank holding company may find itself having to constantly raise capital to meet these requirements across the continent. When their shareholders eventually become fatigued they may be forced to dilute their shareholding. For this reason it is useful for banks with regional operations to have a well-heeled anchor shareholder who can step in with money when it is needed. ABC Holdings has ADC fulfilling this role for them.

ABC Holdings’ regional expansion could be taken as fairly successful thus far. Africa’s growth potential is well-documented and the group is well-placed to benefit from the continent’s imminent success. In a relatively high risk environment like Africa geographical diversification makes sense. Like in any other diversified portfolio there will be underperforming assets and for ABC it is Tanzania. The overall success of the group, however, justifies the strategy to expand.

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