Shrinking loan book a high risk for Agribank

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THE Zimbabwe Independent — the market’s leading investigative paper — will for the next 18 weeks carry insightful stories on the banking sector, based on an incisive analysis done by a consultant on behalf of Alpha Media Holdings. The survey of the 18 banks operating in the country was done using data provided in their financial results for the year ended December 31, 2017, to ascertain the state and health of the banking sector. The banks in their 2017 financials presented mixed results, which in general showed an impressive trend insofar as profitability is concerned, where all but one building society posted a loss. The analysis of the financials was based on key ratios, as well as the balance sheet size and profitability to determine the ranking of banks in 27 categories. The categories analysed and ranked included capital adequacy ratio, assets, deposits, loans, cost-to-income ratio, government securities, net interest income, non-interest income, equity-to-assets ratio, staff costs to total income, cost to income, staff costs to expenses and interest expense-to-interest income ratio, among other indicators. The analysis focussed on the 14 commercial banks and four building societies, namely; Agribank, BancABC, Barclays, CABS, CBZ, Ecobank, FBC Bank, FBC Building Society, Nedbank (MBCA), Metbank, NBS, NMB, POSB, Stanbic, Stanchart, Steward, ZB Bank, and ZB Building Society.

By Kuda Chideme

Today we begin a series of stories informed by the analysis, which we will publish in alphabetical order starting with Agribank.

State-owned Agriculture Development Bank (Agribank) has the largest ratio of non-performing loans (NPLs) to total loans at 14%, double the industry average of 7,08% as at December 31, 2017, a survey of the country’s banking sector done for the Independent has revealed.

The ratio, a reflection of the quality of a financial institution’s loan book, largely points to a weak credit vetting system of borrowers by the bank. Out of the sector’s US$251 million NPLs, Agribank accounted for US$12 million. As at December 2017, the bank’s gross loans and advances totalled US$95,9 million, a 12% decline from the prior year’s US$109,2 million. A breakdown of the bank’s loan book reveals that 49,5% of the loans were advanced to individuals, while just 23,6% was extended to the agricultural sector. The manufacturing and services sectors shared the remaining 8% and 13% respectively.

A turbulent economic environment saw NPLs peaking above 20% before the government, through the Zimbabwe Asset Management Company (Zamco), bought close to US$1 billion worth of bad loans from the banks. The central bank has since established a Credit Reference Bureau, a unit that gathers and maintains data on the credit history of individuals and businesses. This information is then made available to lenders to determine the creditworthiness of a potential borrower. The survey also showed that Agribank is among the banks with the highest cost of funds at 4,2%.

The situation is expected to improve as the bank, which was previously placed on the United States’ Specially Designated Nationals sanctions list for propping up former president Robert Mugabe, is now in a position to engage foreign financial institutions and source cheaper lines of credit.

Agribank’s total income at US$32 million constituted US$22 million from lending activities, while non-funded income at US$10 million was up 115% from the previous year’s US$4,9 million.

Operating expenses increased 8% from US$22,27 million to US$23,97 million to give a net interest income-to-operating expenses ratio of 92%.

This ratio reflects the ability of the bank to meet the operating expenses from the interest earned. Any figure below 100% means that the bank has to rely on non-interest income to bridge the gap.

The bank’s costs remain high with a cost-to-earnings ratio of 75%. With a capital base of US$57,7 million, the bank boasts of an impressive capital adequacy ratio of 39% more than twice the central bank requirement of 12%. Government, the shareholder, is expected to inject a further US$10 million into the bank this year.

Agribank is targeting to achieve capital base of US$100 million by 2020 in line with the central bank’s capital requirements. Under the Reserve Bank of Zimbabwe 3-tier bank system large indigenous commercial banks and all foreign banks would be required to have capital of no less than US$100 million while Tier 2 banks should maintain minimum capital requirements of US$25 million. Tier 3 comprises of deposit-taking micro-finance institutions with a minimum capital requirement of US$7,5 million.

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