ZIMBABWE’S largest financial services group CBZ Holdings’ net profit for the six months to June stood at US$12 million, almost flat-lining at prior comparative period. Zimbabwe Independent projects editor Bernard Mpofu (BM) speaks to CBZ Holdings chief executive Never Nyemudzo (NN) on the group’s latest performance. Below is the interview:
BM: During your analyst briefing, you said cash shortages in the market had badly weighed down on your performance. How do you seek to address this problem should this variable remain the same?
NN: The cash challenges brought about a new layer of challenges for the whole sector and the country. The most obvious impact has been the decrease in the velocity of money and the ability of some sectors of the economy to transact.
However, let me emphasise that massive opportunities have opened up in terms of how the sector can serve its clients, and those traditionally excluded, more efficiently and cost-effectively. The proliferation of digital banking and mobile money has turned Zimbabwe into a cashless economy, which has massive benefits in terms of costs, coverage, transaction speed and tax efficiency. Our salvation as a sector lies in our ability to roll out customer-centric and converged digital platforms that allow people from all walks of life to transact without the need for physical cash.
BM: We have observed that your lines of credit have been on a downward trend since December 2013. What do you attribute this to?
NN: It’s important to understand the recent trends and dynamics on the lines of credit in the context of sub-Saharan Africa in light of the obtaining global economic outlook.
As CBZ (bank), our focus has been to review the cost of funds and project viability with a view to enhance ex-post borrower performance. We have been able to obtain favourable lines of credit dedicated to high-impact areas such as low-cost housing, renewable energy, agriculture and SME financing. However, generally speaking, the decline in lines of credit portfolio is a deliberate strategy by the bank to manage cost of funds in view of their relatively higher cost compared to local funding.
While rates on the market have been declining, costs of some of the lines of credit have actually been increasing as some of the lenders put a significant margin in their pricing, and this margin has been steadily increasing over the years. This then affects viability when on-lending funds from those lines. The bank, however, maintains a good relationship with the offshore lenders, and will certainly renew such lines when conditions allow.
BM: The bank has over the last year taken up a significant stock of Treasury Bills (TBs) — US$828 million as at June 30, while net advances have marginally increased between 2016 and 2017. Would you want to elaborate on this?
NN: Let me hasten to say that this is purely an issue of strategy on our part. With the way local interest rates are going, we are seeing, in the short term, a convergence where the effective interest rates on TBs will be more lucrative than an ordinary straight loan because of reduced risks.
Also the issue of how much TBs we are holding is relative to our size. History has shown government’s capacity to settle both the capital and interest and at this point there is no doubt that we will not be paid. Furthermore, the bank took a deliberate policy to manage potential default risk by taking the route of transferring slow-moving accounts to the Zimbabwe Asset Management Company.
The bank acquired TBs in exchange of loans, which has resulted in an increase in financial securities. In light of the prevailing economic environment, the bank has taken a cautious approach to growing credit. The risk appetite is skewed towards export-oriented entities.
BM: What is your outlook on Zimbabwe’s interest rate regime?
NN: Our financial assets holding hugely reflects our view on interest rates going forward. We fully support the RBZ’s thrust to make funding more accessible and affordable. We believe the low interest rates are essential for the revival of productivity, more so if directed towards export-growing entities and import-substituting companies.
BM: The group’s non-interest income registered a 16% growth, while interest income marginally rose. Is this where you want the numbers to stay and why?
NN: The growth in non-interest income over the past few years has been very positive in light of our thrust to diversify income streams.
While we continue to serve our clients with traditional banking that generates interest income, our positioning as the largest financial services group also opens massive opportunities for us to earn relatively low-risk non-interest income.
This is a line that we look forward to firm even further as our clients fully embrace the digital platforms we are putting in place to facilitate payments, financial inclusion, micro-insurance coverage, low-cost housing among other initiatives. We also have a robust innovation strategy to support business development and have a focus on new markets, all with a view to diversifying our income streams.
In terms of numbers, the 16% increase in non-interest income was due to the group’s focus on increasing transactional volumes driven by investment in technology. The marginal increase in interest income was mainly due to an 18,4% reduction in interest expense offset by a 10,2% reduction in interest income in line with the general reduction in lending rates.
BM: How did you manage to lower your cost-to-income ratio to 66% in June 2017 from 72,2% in prior year?
NN: As part of our five-year strategic plan, we put in place a working programme that seeks to lower our cost-to-income metrics to certain levels. We have revisited our model, our systems and technology, our processes, our distribution channels and our supplier contracts with a view of making these more efficient, streamlining redundancies, reducing manual processes and increasing our service agility. The fall in cost performance metrics is a direct result of our deliberate thrust on process re-engineering to reduce, reorient and optimise costs. In other words, the cost-to-income ratio improved due to 8,6% increase in revenue compared to marginal 0,4% increase in operating expenditure as a result of cost containment initiatives mentioned above.
BM: How has the business been affected by the termination of correspondent banking relationships with Commerzbank AG?
NN: There has been a general de-risking exercise out of Zimbabwe by a number of correspondent banks, including but not limited to Commerzbank. Our options as a country in using alternative correspondent banks has now been limited to banks that are outside New York.
BM: We have also observed a sharp growth in write-offs during the period ending June 2017. How do you explain this?
NN: Given the prevailing environment, we have retained a prudent approach which accepts the difficulties faced by our clients and we would rather increase our provisions and write-offs in order to maintain a quality earning loan book.
BM: How much is the mortgage financing unit contributing to the group’s profitability and where do you want it to be?
NN: The contribution of mortgage finance to the group’s profitability is 10,2% and the group target is to grow this to 15%, based on the group’s housing projects now and in the near future, and let me add that we are quite happy with the growth trajectory and the success we are experiencing in developing low-cost housing solutions.