ZB HOLDINGS chief executive Ron Mutandagayi says the bank will employ balance sheet de-risking as on ongoing strategy in a bid to hedge it against loss of value and concentration risk as capital reservation continues to be a key area against rising inflation.
By Melody Chikono
A number of institutions in the country have been on a drive to cut costs, increase efficiency and trim portfolios against high risks, which have been propelled by currency-related volatility in the country.
In the first half of 2019, a significant contribution to operating income was reported in the form of exchange income, having arisen from the movement in the exchange rate, which increased by 216% from the maiden rate of US$1:ZW$2,5 in February to US$1:ZW$7,895 at the end of June 2019.
The total unrealised exchange gain during the period amounted to ZW$29,4 million.
This came after the government banned the use of the multicurrency regime, making the Zimdollar the sole legal tender through Statutory instrument 142.
Mutandagayi told businessdigest on the sidelines of an analyst briefing last week that value preservation of assets was a very difficult proposition for a bank given certain prevailing regulations that will not allow the financial institution to move onto non-monetary assets.
“It is a very difficult proposition for a bank. The easiest way to do that is to move onto non-monetary assets, but we have certain regulations that we are expected to abide by. As a law-abiding institution, we will continue to do so, where we are able to, as I indicated in my presentation that there are certain limits within which we can harden our balance sheet. The problem at the moment is that there are not many non-monetary assets available,” he said.
During the period, total assets grew 63% while total capital reserves increased 152% to ZW$303,2 million from ZW$120,4 million in full-year 2018.
Earning assets contributed 66% of total assets, down from 68% as at December 31 2018, while property and equipment, investment properties and investments in associates increased largely as a result of translation from US dollars to ZW$ at he beginning of the period.
Despite general liquidity pressure experienced during first quarter, the financial services group was able to maintain an aggregate liquidity ratio above 80% throughout the period.
The group’s total equity increased by 152% from ZW$120,4 million as at December 31, 2018 to close the period at ZW$303,2 million, driven by positive performance as well as the impact of the functional currency translation reserve.
However, Mutandagayi said financial performance in the near-term is highly susceptible to volatility in macro-economic factors, particularly general price trends, as well as the availability and pricing of foreign currency, and market liquidity conditions.
“As a bank the challenge is if you have got negative real interest rates it means that you are not able to maintain value. We would love a situation where we would index our interest rates to inflation but if we did that no one will have the capacity to repay those loans, so I think we expect government to work on inflation, reduce that inflation to sustainable levels.
“As you know, inflation exchange rates are one side of the same coin and we need them to deal with all those issues to ensure that we get stability in the economy and predictability from a planning point of view,” he said.
In response to the changing operating environment and attendant business threats, the group has commissioned an “organisational transformation programme”, which, among other outcomes, seeks to re-evaluate the business model, processes and systems.
During the period, the bank’s Treasury Bills portfolio achieved a value-weighted yield of 10,39% against the group average minimum lending rate of 13,4% during the period, representing a negative return when compared to the inflation outturn.
Interest rate at 21% also remained on the negative, given high year-on-year inflation rates.
Among other key strategies, the group is seeking to mobilise more lines of credit and increase activity in international business, trade finance and project finance in order to enhance the quality of earnings.