The country’s largest financial services group by deposits and assets, CBZ Bank, is exposed to the cash-strapped government through Treasury Bills (TBs) to the tune of US$760 million.
By Chris Muronzi
Although TBs are one of the safest investment instruments and government always pays on maturity of its short-term securities, the risk of defaulting is growing due to its deepening fiscal crisis.
According to CBZ’s full-year financial results to December 31 2015 (FY15), the bank’s exposure to government paper rose from US$471 million in the prior financial year to US$760 million. CBZ reclassified US$471 million, previously listed as money market assets on its statement of financial position, to financial securities.
This comes after Finance minister Patrick Chinamasa last year said government had no capacity to service domestic debt, forcing banks to roll-over on maturity, a development currently posing financial risks on domestic debt instrument holders and financial institutions.
“This situation, unfortunately, is not tenable and is undermining the stability of the financial sector and overall economy,” Chinamasa warned when presenting his mid-term policy last year.
“Further to this, government borrowing is also crowding out lending to the private sector and, hence, stifling new domestic investment and growth.”
Government’s financial position has not yet improved, with signs the economy could decline further now more evident.
By Chinamasa’s own admission and judging from government’s apparent lack of financial capacity to honour maturities, CBZ faces serious risk emanating from the US$760 million exposure which represents 38% of the country’s US$2 billion total TB issuance. Between FY15 and FY16, CBZ’s Treasury Bills portfolio increased by as much as US$290 million.
In the event of a government default, CBZ Bank could be left seriously exposed.
However, analysts say some of the bank’s paper had longer dated tenure rate of more than five years. In five years, analysts reckon economic fundamentals could be a safety net should there be political changes.
The government through the Zimbabwe Asset Management Company (Zamco), a special purpose vehicle to assume non-performing loans (NPLs), has also assumed local banks’ bad debts and offset the cost with TBs to banks.
However, the bulk of the TBs are locked in paper that matures after five years. Normally, Zamco paper has the longest tenure of 15 years. CBZ says US$46,6 million of the US$760 million was due to mature in zero to three months, and US$1,5 million was due to mature in three to six months. A total of US$26 million was due to mature in six to 12 months, US$106 million was due in one to five years, while US$529 million was due to mature after five years.
CBZ had loans amounting to US$453 million due to the bank in a month from the December reporting period.
The government paper has been discounted by some players to raise cash, while other financial institutions have taken hold positions on the financial instruments. There is an acute shortage of cash with banks unable to meet withdrawals by depositors for almost a year.
CBZ has not offered an explanation as to how it ended up with a concentration of such assets or how it accumulated the TBs stock. Banks feel that long-term government paper is less risky than individual and corporate loans.
Ideally, government paper is a safe bet for financial institutions. But recent economic developments in the troubled southern African country characterised by cash shortages, company closures, lack of credit and rising joblessness, have heightened fears banks could be playing a zero-sum game on government paper.
CBZ’s TBs represent 40% of the bank’s total US$1,9 billion assets. The bank was sitting on US$1,7 billion in deposits as at December 2016. The bank’s liquidity ratio averaged 51,84% for FY16, while its liquidity ratio at year-end stood at 76,65%, the highest for the year.
The minimum for the year was 50,84%. A liquidity ratio is a measure of the bank’s capacity to meet obligations when they fall due. The figure is way below a globally accepted rate of 100% or above, in terms of Basel 3 guidelines. The CBZ had only US$73 million in cash and bank balances as at December. Loans and advances to customers amount to US$873 million, with other assets amounting to US$108 million.
Asked why the group has 40% of its assets concentrated in a single asset class, CBZ group CE Never Nyemudzo said he was comfortable with the figure.
“This is an issue of strategy on our part. If we are able to do what we intended to do by holding those TBs, then yes we are happy with that number given the value we are able to derive from the assets. We have been able to leverage the sovereign debt to raise long-term funding for the group,” Nyemudzo said this week. “Also the issue of how much TBs you are holding is relative to our size.”
Nyemudzo said the CBZ had accumulated the US$760 million from various sources such as open market operations of the central bank, compensation for foreign currency the central bank helped itself to in the 2008 hyperinflation era when the Reserve Bank of Zimbabwe (RBZ) Debt Assumption Act was enacted and from NPLs.
“We have three sources of the TBs. If I remember correctly, we got a portion of the paper from central bank tenders in 2009 right through 2012, I think. Then we got some as compensation for the foreign currency we sent to the RBZ when the RBZ debt assumption was signed and we got around US$88 million for NPLs,” he added. He said government has been meeting its obligations on maturity so far.
Asked why interest from TBs was outstanding on its books, Nyemudzo said government pays interest bi-annually and these could be amounts which had matured outside government payment window.
“As far as we are concerned, if the interest and the principal are being serviced, we are happy. Government pays interest bi-annually and hence the amounts you mention could be amounts that would have been paid after our financial year end. But they are current,” he said.
Valuations concerns of TBs have also taken centre stage with no immediate and agreed valuation formula. The absence of discount houses in the country means that there is no proper market for TBs.
Another financial institution, ZB Bank, is holding onto TBs amounting to around US$120 million. ZBFH chief executive Ron Mtandagayi two weeks ago said some of the TBs on the group’s books had accumulated from bad loans assumed by Zamco, which were offset via TBs.
The group invested in short-term TBs issued by the RBZ over a period of 180 days at a rate of 8,5% and purchased TBs from the secondary market. Management feels government risk is a better bet to corporates and individuals.
These TBs have coupon rates ranging from 2% to 5% with maturity periods ranging from one year to four years, Mtandagayi said.
The group said it received TBs as substitution for debt instruments from Zamco with a coupon rate of 5%.
“The Capitalisation Treasury Bills (CTBs) with a face value of US$20 000 000 were acquired on 26/05/2015 from the Government of Zimbabwe against an interest free loan at the Holding Company. The CTBs were then used to recapitalise ZB Bank Limited, a 100%-owned subsidiary. The CTBs mature on 26/05/2025 and carry a coupon of 1% which is payable on maturity,” the group said.
As of September last year, RBZ governor John Mangudya said he had issued US$1,4 billion worth of TBs. Of the US$1,4 billion, 50% went into capitalising the RBZ and other institutions. A few weeks ago, Mangudya said he had issued more TBs, bringing the total paper in issue to US$2 billion. Although governments the world over are known to issue various instruments, Zimbabwe has no capacity to honour payments as and when they fall due. Of the US$1,4 billion, Mangudya said US$275 million had gone to government financing, while Zamco got US$300 million.
Mangudya added that the repayment of RBZ debt has been approved.
Zamco paper has 15-year tenure, while some of the paper has wide-ranging maturity rates, he said.
The issuance of additional TBs in the last quarter of 2016 was widely expected, given government’s need to retire the central bank’s debt of US$1,4 billion in line with the approved repayment plan, more than US$400 million for budget deficit financing and an unquantified amount to government creditors.
In his mid-year fiscal policy review statement last year, Chinamasa disclosed that a US$623 million budget deficit for the six months to June would be financed through the issuance of TBs by the central bank.
Banks sitting on bad loans could be forced to take up more TBs despite the credit risk attached to the paper.
Last week, the government committed to paying cash bonuses to civil servants.
This means government could resort to running the printing press or finding additional funding to appease restless civil servants. The need to assume the central bank’s US$1,4 billion and finance state operations has heightened fears the financially struggling government could have triggered an inevitable financial crisis as liquidity conditions worsen in the market as banks mop up the paper.
Smarting from high NPLs, which rose to a peak of US$700 million, banks have also been taking positions on the paper and see the instruments as an opportunity to safeguard depositors’ funds in such hard economic times.
Traditionally, central banks run open-market operations to buy and sell government securities in the market in order to expand or contract the amount of money in the economy, among other monetary objectives.
Poor revenue collections in the half year to June and unrestrained expenditure on the part of government resulted in a cumulative budget deficit of about US$623,2 million, far above the full-year target of US$150 million.
As of April last year, TBs taken up by banks shot up from US$326 million to a massive US$1,2 billion during the same period, cementing fears that government’s borrowing is crowding out credit activities in the banking sector.
Given that government’s borrowings are largely unproductive, this situation raises the spectre of further challenges for the economy.
To stimulate the economy, central banks tend to lower interest rates and increase the amount of money circulating in the economy.
According to the financial results of CBZ and ZB banks, the financial institutions froze lending in FY16.
“A guarded approach to credit creation continued during the year, leaving net advances almost flat at US$99,2 million despite substantial recoveries,” Mtandagayi said.
CBZ’s loans and advances declined marginally to US$873 million from US$883 million. This means that there is no funding going into production.
It is generally accepted that low interest rates stimulate productive lending capacity of banks.
Zimbabwe’s economy is on the precipice as the liquidity crunch and cash shortages further erode confidence in the banking sector. The cash shortages could see sustained withdrawals from the formal banking system. Furthermore, the increase in RBZ borrowing activities means banks are stuck with TBs, soaking up productive lending.
The central bank figures show that TB holdings and balances held with the RBZ by commercial banks have increased substantially in the last 24 months, while lending to the private sector has slowed down.