FMB-Barclays project a mixed financial bag

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THE biggest corporate news last week was that First Merchant Bank (FMB) of Malawi had bought a controlling stake in Barclays Bank Zimbabwe after agreeing terms with Barclays Plc. What are they likely to bring to the Zimbabwean corporate scene? It is a mixed bag.

The Brett Chulu Column

Based on its latest financial performance (2016), FMB has total assets under its control amounting to US$458 million. This is about half the balance sheet of CBZ Holdings, Zimbabwe’s biggest financial entity.

Its annual operating income is US$48 million, with 61% coming from net interest. Its operating expenses- to-operating income ratio was 67%.

The bank’s staff costs gobbled up 33% of the operating income. Its loan-to-deposit ratio is 56%. FMB is currently listed on the Malawian bourse. It has a market capitalisation of US$52,3 million.

Its market-to-book value on the basis of equity attributable to shareholders is 1,17, representing a 17% premium. However, on the basis of total equity, its market-to-book value is 0,88, representing a discount of 12%. In general, investors have a favourable perception of FMB and seem to trust the quality of its underlying assets.

Turning to its history and structure, FMB was the first private bank to be granted an operating licence in Malawi in 1994. It began operations the following year.

Prior, there had only been two state-controlled banks. The bank was founded by the late Nartwarlal Gordhandas Anadkat, affectionately known as NG and his US-educated economist son Hitesh Anadkat. Nartwarlal passed away in 2015. Hitesh took over as the chairman in 2015.

FMB has eight subsidiaries, three of which are banks in Sadc countries. FMB controls 70% of Capital Bank Mozambique, 49% of First Capital Bank Zambia and 38,6% of Capital Bank Botswana. Plans are afoot to form a new holding entity called FMB Capital Holdings that will be registered in Mauritius after purchasing Barclays Zimbabwe.

We start with the disagreeable. FMB in bold print state: “The board has adopted without modification, the major principles of modern corporate governance as contained in the reports of Cadbury and King II, and the Basel Committee on Banking Supervision.”

Right there is a problem. Cadbury has since been replaced by the UK Code. King II is now two revisions behind. FMB does not even state that they subscribe to the Code of Best Practice of Corporate Governance in Malawi.

The first problem is that the chairman of FMB is its founder and is a major shareholder in FMB. In Zimbabwe, we have since been very firm on major shareholders chairing their own boards. He personally holds 4,76%, and a related vehicle called NG Anadkat Limited holds 7,15%.

Memories are still fresh of omnipotent founding shareholders of collapsed banks who held boards in their sway and forced them to do their bidding. The tale of insider loans and abuse of depositors’ funds in founder-controlled banks is now the stuff of Zimbabwean corporate folklore. The case of the founder of FMB chairing their own board is not kosher in the Zimbabwean corporate governance context — our history suggests that it is anathema.

FMB has to assure us how when they control Barclays Zimbabwe, the chairman of FMB will ensure the local Zimbabwean board will act independently.

There is a major corporate governance challenge. The fact that FMB discloses the personal interests of the chairman is a welcome development we hope will be introduced to its prospective Zimbabwean operations. FMB was upfront in declaring that its chairman has direct beneficial interests in a 99-year lease granted in 2003 by Livingstone Towers, debentures (loan) with no fixed-term granted to Chief M’Mbelwa Building and Livingstone Car Park.

This is a Bill Clinton-like strategy, in which his aide forced him to hold a press conference to read out a letter which he had written refusing to be drafted in the Vietnam War; he pre-empted the media who had the letter that would have blown his first presidential bid out of the water. Bill sat at the press conference until the media had exhausted all its questions. He dished his dirt in public and the electorate loved him for such brutal honesty.
The fact that FMB discloses such transactions does not take away the fact that the influence of the founder-chair is potentially huge and can be used to serve their self-interest.

FMB is a shareholder in Telkom Networks Malawi (TNM), a key mobile network operator in Malawi. The founder-cum-chairman of FMB is the vice chairman of TNM.

TNM, unintentionally, exposes the hypocrisy of its vice chairman. Just analyse this statement from TNM on its Appointments and Remuneration board committee: “The committee chairman (who cannot be TNM board chairman) is required to be an independent non-executive director. No director or manager can be involved in any decisions as to their own remuneration, and the remuneration of non-executive directors is a matter for the chairman and the executive members of the Board.”(emphasis is not mine).

Guess who is the chairperson of the FMB remuneration committee? It is FMB’s founder-cum-chairperson. All you need to do is to lift the TNM statement and put it in an FMB corporate governance statement. Put simply, the FMB chairman does not qualify to be the chair of the remuneration committee of FMB. So why does the chairman continue to sit and chair that committee? FMB board must tell us why. We cannot speak for them; they are of age.

Now to the good.

FMB does far better than Zimbabwean banks in disclosing the remuneration of both executive and non-executive directors. FMB discloses the remuneration of its executive and non-executive directors separately.

That is a breath of fresh air. We hope that their Zimbabwean operation will be required to do this. The latest report shows that non-executive directors received board fees amounting to an equivalent US$546 338. Since six non-executive directors served and the attendance record confirms their attendance, it means that each director on average gets US$22 700 every quarter.

Contrast this with the US$6 000 that Public Service and Finance ministers recently directed the CBZ Holdings board to peg as the ceiling of board fees per member per quarter.

If FMB introduces these generous remuneration figures to the Zimbabwean market, will that not put pressure on other boards to ratchet up their board fees? Executive directors received a combined equivalent of US$354 600 in salaries, US$119 000 in bonuses and US$28 220 in non-cash benefits (estimate, according to FMB).

This gives a combined total remuneration of US$473 600. The remuneration disclosures, though much better than we get in Zimbabwe, are still incomplete, raising more questions than answers.

The FMB report shows that only one executive director served on the board. Are we to conclude that the US$473 600 disclosed is what this single executive director received in one year? FMB should just go all the way and disclose remuneration director by director and line by line, just like South African-listed companies do.

Salaries and bonuses are not the only remuneration components that executive directors receive. What about pension?

What about non-concessionary loans (the discount element)? Put simply, FMB remuneration disclosures are incomplete.
It is truly a potentially mixed bag.

Chulu is a management consultant and classic grounded theory researcher. He has published research in an international peer reviewed academic journal.

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