Non-performing loans (NPLs) could rise in the current financial year after financial institutions struggled with bad loan books in the full year to December (FY15), an analysis of banks’ financial results shows.
By Chris Muronzi
Several banks impaired loans in FY15, signifying potential problems for indigenous banks as disposable incomes diminish and the economy falters.
Bad debts at their peak had risen above US$700 million, showing increased credit risk in the financial sector.
While the majority of banks posted profits in FY15 reporting period, a look at indigenous banks financial results shows that NPLs could rise further, creating a new headache for the central bank.
Although the Reserve Bank of Zimbabwe (RBZ) created a special purpose vehicle, the Zimbabwe Asset Management Company (Zamco), to absorb banks’ bad loans two years ago, judging by the latest financial reports the problem is far from over. The new structure has so far absorbed US$357 million in bad loans.
In fact, a number of banks are seen selling more debt to Zamco to further clean their balance sheets.
But with Zamco now fully operational, experts see banks gradually writing off loans that they had previously classified as substandard or in some less worrying category.
Already, there has been an increase in provisions for bad loans and impairments. The central bank has set a non-performing ratio target of 10% by June 2016 and 5% by 31 December 2016.
CBZ Holdings, the biggest financial institution in the country by deposits and loan book, had total advances of US$952,8 million, down from US$1,02 billion in the prior year with provision for impairment on advances amounting to US$23,3 million, from US$16 million in FY14. Amounts written off grew more than five-fold to US$23,9 million from US$4,3 million in FY14.
A CBZ segmental analysis of the impairments showed that the group’s commercial banking business contributed to the bulk of the impairments.
For instance, commercial banking had a US$24 million impairment in FY15 from US$17 million in FY14. CBZ mortgage finance also reported a US$1,1 million impairment from US$1 million in 2014.
Of the US$25 million impairment on the group’s books, commercial banking business contributed US$24 million. The impairment arising from the group’s insurance arm was US$236 000 from US$148 420 in the prior year.
Of CBZ’s US$952,8 million loan book, US$686 million was classified in the normal grade.
An asset is classified as normal if it is fully protected by the current sound worth and paying capacity of the obligor, while performing in accordance with contractual terms.
Loans classified in the special mention grade amounted to US$333 million.
A loan in this category is an asset which is past due for more than 30 days but less than 90 days.
Loans under substandard grade amounted to US$48 million, while US$28 million was classified under doubtful and loss grade. Substandard grade is a category when an asset is past due for more than 90 days but less than 180 days and some of sort of renegotiation has occurred.
Doubtful debts, those classified as past due for more than 180 days but less than 360 days and exhibits all the weaknesses of a substandard asset and is not well-secured, are also huge.
On non-performing advances, CBZ said total advances on which interest is suspended stood at US$73,1 million in FY15 from US$84,2 million in FY14. On provision for impairment of advances the opening balance stood at US$61,7 million in 2015 from US$33,4 million the prior year.
Charge for impairment grew to US$22,1 million in 2015 from US$16,8 million in 2014. Interest in suspense declined to US$9, 3 million from US$15,7 million in FY14. Amount written off in 2015 was pegged at US$23,8 million up from US$ 4,3 million in 2014. Balance at end of the last year stood at US$69,3 million from US$61,7 million in 2014.
In a statement attached to its results, CBZ said the concentration risk was limited because its customer base is large and unrelated. The group is not exposed to any customer by more than 10% of the total advance book, it said.
Barclays Bank Zimbabwe, one of the oldest banks in the country, reported a total income of US$40 million. Of the US$40 million, total net interest income was US$16,6 million. A total US$28 million came from fee and commission income.
Impairments on loans and advances amounted to US$1,6 million from US$532 000 in the prior financial year. This was achieved from a loan book of US$141 million, reflecting a quality loan book. Barclays and other conservative foreign banks have been lending prudently and cutting back on its lending activities at a time other banks were aggressively growing their loan books at an astronomical rate.
The bank classified a total US$2,5 million of its loan book as non-performing. A total US$468 000 was individually impaired. A loan is considered impaired when a customer misses instalments or fails to repay the loan on due date, while NPLs are loans and overdrafts on which interest is no longer accrued or included in income unless the customer pays back. The bank said it did not have any renegotiated loans on its book.
FBC Holdings’ net profit increased by 30% to US$18,1 million helped the Turnall divestment in its FY15 results.
The banking group said it had revised its appetite for lending to a more prudent one.
“The level of our impairment allowance on financial assets improved significantly, following the redefinition of our risk appetite. We are now prudent in our approach to lending and have in the process, taken measures to de-risk those counterparties falling outside our risk appetite. These initiatives, aided by the reserve bank’s scheme to transfer secured NPLs ratio improving to 6,9% from 15% last year,” the bank said in a statement attached to its results.
The group transferred total loans amounting to US$8 million to Zamco.
Group’s total income rose 5,9% to US$81,9 million buoyed by growth in net interest income of 2% at US$3,8 million. Fee and commission income was US$20,8 million.
The bank said US$9 million was classified a substandard while US$2 million was categorised as doubtful. US$12 million was classified in the loss grade in FY15 from US$17 million in FY14. The gross amount past due and impaired was US$24 million for FY15 from US$52 million in FY14. An impairment allowance of US$14 million was recorded in the same period.
FBC increased its loan book by 4,5% from US$252 million from US$268 million.
“Stringent credit policies were put in place to ensure that new credit was advanced to duly qualifying customers.
Asset quality has significantly improved with NPLs down to 8% as at December 2015 in compliance with the RBZ guidelines of 10% set from 30 June 2016,” the bank said.
ZB Bank in FY15 wrote off US$8,4 million loans. The banking group said the NPLs decreased from 29% to 20% aided by the debt recoveries by Zamco.
Zamco provided a credit relief to the group with treasury bills worth US$13,6 million being received for NPLs, through asset rescue packages. The rescue assets were largely in mining sector with 88%.
BancABC reported loan impairment charges of US$28,4 million, up from US$14,5 million prior year. Net new impairments for the period were US$7,1 million from US$30 million while usage of allowance against bad debts written off stood at US$1,5 million compared to US$16 million prior year.
In its FY15 statement, MetBank said it had received Treasury bills with a face value of US$1,25 million from Zamco.
“These were in exchange for some NPL exposure with a book value of US$1,7 million. The bank wrote off the resulting loss of US$0,5 million from this transaction through profit and loss,” said the bank in its results statement.
Without doubt, the transfer of toxic loans to Zamco has helped banks record positive earnings in FY15.
In 2014, the central bank set up the Zamco to clean balance sheets of banks and other companies in key economic sectors.
Zamco was introduced after NPLs hit a peak of 20% in 2014 from as low as 5% after the introduction of the multi-currency regime in 2009.
The post-multi-currency period has seen eight banks — Genesis, Capital, Interfin, AfrAsia, Tetrad, Royal, Trust and Allied — going under largely due to corporate governance failures and high NPLs, prejudicing depositors of their hard-earned cash and undermining public confidence in banks, key financial intermediaries.