Addis Fortune (Addis Ababa)
Elias Meseret
24 December 2007
Addis Ababa — Bank of Abyssina reported a net profit of 66.3 mln Br in the 2006/7 fiscal year, enabling the Bank to pay its shareholders nearly 50 mln Br in dividends, close to double what it had paid the previous year.
Behind these encouraging figures, however, lies some disappointment for shareholders. Earnings per share have declined from 10.7 Br in the previous fiscal year to 6.2 Br due to a 23pc decline in net profit.
Directors of the bank told shareholders at the Addis Abeba Hilton on December 8, 2007, that profit has declined due to an increase in provisions to secure loans that are considered to be at risk. Indeed, Bank of Abyssinia has amassed an alarming rate of non-performing loans (NPLs), loans at least 90 days in arrears, and has thus been forced to set aside 63pc more than last year as a precaution, adding to the 46.7 mln Br already in provision.
Commercial banks in Ethiopia are compelled by the National Bank of Ethiopia (NBE) to reserve provisions equal to the amount of NPLs. Bank of Abyssinia has a total of 107.8 mln Br in NPLs, which is about 5.1pc of their total 2.1 bln Br loan portfolio, according to calculations by Fortune. This percentage, however, is about half the internationally accepted level for NPLs.
Industry observers, however, attribute the increase in NPL to loans advanced to major shareholders that have influence on both the board of directors and the top management. The directors' report distributed to shareholders candidly divulges that the single borrower limit defined by the regulatory bank has been violated; "a group of connected borrowers" has taken 18pc more loans than allowed, the document says.
Auditors of the bank, A.A. Bromhead & Co., are also concerned with an unusual practice by powerful shareholders at Abyssinia of taking shares of the company with a promise to pay later, and then using the unpaid shares as collateral to get credit from the bank for other purposes such as merchandise loans, letters of credit and overdraft. There has been an investigation by the Board of Directors, following orders by the central bank, to determine whether or not shares bought and sold last year among major shareholders, known as the Group of Seven (G7), breached any law.
"Our attention was drawn to the purchase of fully paid-up [shares] and prescribed but not fully paid-up shares of the Bank by some shareholders and third parties from other shareholders and the Bank financed by advances obtained from the Bank for their businesses and diverted for the purchase of those shares," said the auditors in a letter published in the year-end report.
Shareholders such as Tebekew Bale, Nega G. Egziyabher, Getu Gellete, Buzayehu Tadelle, Weldher Yezengaw and Abebaw Desta were asked by the management, in August 2007, to explain what they have done with a series of loans they have taken from the bank where they held significant shares. Following a legal opinion made by the Legal Department of the NBE, which argues that it is acceptable for shareholders to buy shares with a loan they get from the bank, the issue remains unresolved and ambiguous.
"The legal counsel we obtained on this issue was not definite on whether the manner of financing of the purchase of the shares contravened the commercial code," the auditors said.
Not only are shareholders concerned with the rise in provisions, and the dispute surrounding why NPLs have gone up, they also believe that they are paying executives at the bank too much money.
Philippos W. Mariam, chairman of the board of directors, declined to comment. CEO Aselefech Mulugeta was also unwilling to respond to Fortune's written enquiries.
The remunerations of the board of directors of the bank were adjusted in 2003/2004, in a bid to reflect the market price at the time. The board chairman, for instance, is paid a monthly fee of 2,500 Br and a transport allowance of 750 Br, while other directors earn 1,500 Br plus 600 Br for transport allowance. On top of that, directors are entitled to five per cent of the bank's net profit should the profit exceeds 7.5pc of its capital. Shareholders, however, claim that the directors grossed 350,000 Br each in the last fiscal year.
Shareholders have created a five-man committee to investigate the directors' remunerations and recommend to the board what it believes is appropriate compensation.
Not everything though is displeasing at the Bank of Abyssinia, which was established in 1996; it is one of the three private banks with paid up capital exceeding 250 mln Br. According to a financial analyst, the bank is in a solid shape overall, with its total assets growing by 19pc, reaching 3.5 bln Br. Its total deposits at the end of the fiscal year rose by 25pc to 2.7 bln Br.
In addition, while the profit margin has declined from 56pc to 36pc, the net interest margin has declined by only one per cent.
Considering that the bank was in a recovery plan in the year 2003/04, after it had suffered a 2.4 mln Br loss, Bank of Abyssinia appears to be making a comeback. It maintains a strong liquidity and manages a sound adequacy ratio, which is usually a problem for other banks, according to the banking expert.
Fact Line:
Bank of Abyssinia's Market Share in the Industry
TOTAL DEPOSIT: 17pc
LOANS AND ADVANCES: 18pc
FINANCING EXPORT: 4.89pc
FINANCING IMPORT: 8.75pc
LOAN TO DEPOSIT RATIO: 87.3pc
Note: This rating was done for the fiscal year 2006 and includes only the private-owned banks.
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