ZBFH: A turnaround success story for 2015

ZB Financial Holdings (ZBFH) saw a dramatic turnaround in its fortunes in 2015 notwithstanding the deterioration in the economic environment from the prior year. After reporting a loss of US$8,6 million in 2014, the group posted earnings of US$8,9 million in 2015, making it Quoted Companies Survey (QCS) 2016 turnaround company of the year. A QCS analyst caught up with the ZB Group Chief Executive Officer Ronald Mutandagayi (RM) (pictured) at his office to discuss this restructuring driven-turnaround.

ZB Group Chief Executive Officer Ronald Mutandagayi
ZB Group Chief Executive Officer Ronald Mutandagayi

QCS: Perhaps you can start by giving us a sense for what the mindset was within the senior executive team after reporting a huge loss in 2014.

RM: We were very much alive to the need to do things differently to change the fortunes of the company and in this regard, we engaged Deloitte and Touche consultancy. At that time, our market position was eighth or ninth, whereas historically, we used to be number two or three and our view was that we need to go back to where we belong. So we came up with a strategy to focus on the value side of things which is cost optimisation. The first thing we did was look at our business model. We were very diversified and we had a stockbroking business for example, where we were doing a number of transactions and we had a couple of loyal customers, but the nature of the business is such that it could not succeed since it could not trade with most institutional foreign investors on account of the sanctions. Our asset management business was small and not traditional core strength of the group. We, therefore, decided to exit these businesses.

On the core banking system, the licence is a major issue for an institution like ours so we looked at our system. We trimmed the information technology usage so that people could only use facilities that they require. For our retrenchment exercise, we engaged our employees very early in the process and worked with them closely throughout to ensure they had a clear understanding of where management was coming from and what we hoped to achieve. As a result, we got significant employee input into the exercise and the process lacked much of the acrimony and tension that normally plagues staff rationalisations. We now have got an organisation that is reasonably efficient, but unfortunately as we were undertaking all these restructuring exercises the revenue cycle was also being affected and it was coming down. If the revenue had held up, I think we would have achieved a better cost-income ratio.

We’re still struggling with a reasonably high cost-income ratio and we will continue to look at it and see what we can do about it. Our strategy is Value & Growth where Value refers to cost optimisation while Growth looks at any revenue enhancement opportunities and we’ve achieved quite a lot in both areas. On the growth side which is revenue growth, we were losing a lot of revenue through services being provided but not adequately recorded. We have since automated the generation of all the charges and stopped the revenue leakages. We decided to increase the technological thrust. We were the first bank that added a mobile app in Zimbabwe. Our strategy is that we don’t want customers coming to the branch unless they want to. They should be able to make transactions in their own homes and in their own offices. We upgraded our systems and conducted transactions on what we call ZIPIT which is faster than RTGS. You can transfer money from one account to another at the ATM, make card to card transfers and can move money from your account to an e-wallet and vice-versa. Another area we looked at unfortunately reduced revenue but I think in the long term allows us to be able to earn more customers was offering free banking to schools, colleges and universities to grow long run sustainable deposits. So that has seen us commanding about 60% of that market. In fact for secondary and primary schools, our market share is almost 90%. We also went after the informal markets with a presence in MbareMusika, Gazaland in Highfield and the Glenview market which was unfortunately gutted by fire in April 2015. We opened a number of the informal accounts and are excited by the potential in this market segment.

QCS: One of the key initiatives that you have taken as a bank is to do significantly less lending and investment more in treasury bills. Could you walk us through the thinking behind that strategy?

RM: Our motivation was our view that the economic environment has been difficult. A lot of clients are financially constrained and when they borrow they find it very difficult to repay resulting in impairments to the bank’s loan book. So as an institution we then decided that we will continue lending, but to the very good customers. But those good customers ask for very low rates like 5% or 6%. We utilise local resources, but those resources are sometimes a little bit more expensive. So you probably find that where customers are asking for really low rates we may not be in their space. We then decided that the best area we could deploy deposits would be treasury bills. I think the history of government so far is that they have honoured treasury bill obligations without fail and we believe they will continue to do so.

QCS: You were able to raise US$20 million from your biggest shareholder during the year under review. As a listed entity you had the opportunity to come to the market for additional capital, why did you eventually go for a private loan instead?

RM: You probably recall that at the 2009 AGM, we were given authority to find a new investor in our business. We sat down and were not able to come up with a new investor as foreign investors had many issues to do with Zimbabwe risk and the fact that the bank is on the US sanctions list. Most local investors did not have the capacity to mobilise the sort of resources that we were looking for. Also, given our current market capitalisation, the dilution to existing shareholders in a rights issue based on our share price trading history would be inordinate.

We believe the long term interest-free loan we received was the best possible outcome in the circumstances.

QCS: What are the challenges in maintaining the earnings growth momentum when you have such a dramatic turnaround?

RM: Some of our income was non-recurring and we are continuing to recover more bad loans. We have recently sold US$6 million worth of loans to Zamco for a 56% discount. We have to look at our portfolio. One area that we are now focusing on is property development as we believe that there are opportunities that can be exploited there.

QCS: What do you think is the ideal structure for a financial services group? What is the vision for ZB as a financial services provider?

RM: Our vision is we would like to be an integrated banking and insurance institution. We are looking to consolidate our gains in the banking sector and simultaneously look to expand our exposure in short term insurance.

QCS: Lastly, what are your thoughts on the cash crisis and the introduction of bond notes?

RM: I think we need to make sure that our industry starts working and make progress reducing our trade deficit.
Along with all the other banks that are members of the Bankers Association of Zimbabwe, we stand by the Reserve Bank’s initiative to alleviate the cash shortages and incentivise exporters via the introduction of bond notes.