18 November 2012

Ethiopia: Despite Solid Standing, Dashen Bank Needs to Worry Over Declined Trends

Dashen Bank has thrived for yet another year after declaring record high profit after tax that also puts the bar high on its peers in the banking industry.

Nonetheless, a bank that is acclaimed by industry analysts as, "the most solid bank" in the industry has managers who ought to be worrying about growing declines both in its capital adequacy ratio and liquidity base.

Conducting its annual meeting two weeks ago at the Sheraton Addis, many of its 810 shareholders had so much to absorb in positive news.

From profit tax growing by nearly 45pc to a record high (for a private bank) of 652 million Br to a 23pc increase in Earnings per Share (EpS) of 926 Br made in its operations in 2011/12, as opposed to last year, Dashen Bank has asserted its dominant place among the dozen private banks.

The Bank had disbursed loans and advances of 7.95 billion Br, an increase of 30.48 from the previous year, and mobilized deposits of 14.1 billion Br, representing an increase of 18.78pc.

"Dashen is in a good shape," affirmed Abdulmena Hamza, accounts manager atLondonbased Portobello Group.

Such is a posturing in a market which comes as a result of good performance in the revenues front. Nearly half of the Bank's revenues came from interest bearing businesses, including 897.7 million Br, claiming 48.7pc increase over last year. Revenues from non-interest streams, 827.6 million, have also showed upward move by a little over half the amount for growth in interest earnings.

"This was achieved in challenging global and domestic incidents that had direct and indirect impacts on the performances of economies of the world in general and of domestic economies in particular," Teklu Haile, chairman Dashen's Board of Directors, told shareholders met at the Sheraton, on November 6, 2012.

They were compensated with dividend per share of 92.6pc, a remarkable reverse from an alarming trend in the four years beginning in 2006. Dashen had seen its return to shareholders' investment from record high of 95.6pc in 2006 down to 60pc in 2010.

Its noteworthy comeback ought to be a pleasant news to shareholders, not only for its highest return compared to global average of 15pc, but also for claiming a significant jump from the previous year's industry average of 37.3pc. Dashen has rewarded shareholders high earnings for their investments compared to AIB's 46.9pc, United's 52.8pc, Abay's 12.1pc and OIB's 14.7pc.

"I'm happy that earnings per share is the highest compared to others," a shareholder with 150,000 investments in Dashen told Fortune.

Analysts attribute Dashen's huge increase in EpS to a growth in profit after tax, but most importantly to directors' decision to beef up the Bank's paid up capital by less than a per cent. At 703.8 million Br, Dashen Bank is one of the highly capitalized banks next to Awash International Bank (AIB), 912.3 million Br, in an industry with an average paid up capital of 444 million Br, for private banks.

Despite such positive news that no doubt cheers shareholders, there are trends that ought to be concerns to senior managers and directors of the Bank, although none are threatening to its market position, according to analysts.

The devil is no doubt in the detail.

Banks' decision not to further capitalize but reward shareholders awesomely remains a subject of intense debate in the industry, which is rocked by global economic meltdown. There are voices even among Dashen's shareholders who are concerned with its directors' decision to pass the operation's year without further capitalization.

"For a country like Ethiopia, which both internal and external factors affect its economy, the Bank should be better prepared for the harsh times that may come in the future," the shareholder who talked to Fortune said a day after directors announcing the latest result.

More alarming should, however, be Dashen's declining capital adequacy ratio (CAR), which went down by 2.3 percentage points, from 18.9pc in 2010/11.

This may make the bank "vulnerable," according to Abdulmena.

Banks should be cautious about their CAR position because high adequacy ratio cushions them during times of unforeseen difficulties, while it protects their depositors when their liability exceeds their assets and liquidity, according to a veteran of the private banks.

He was involved in a study commissioned by the industry lobby group, Ethiopian Bankers' Association (EBA), to identify the effects of government requirement for banks to buy bonds comprising 27pc of their loans and advances. Dashen, for instance, spent close to two billion Birr in the National Bank ofEthiopia's (NBE) treasury bills. This investment soared by 108.53pc in 2011/12; and represents 11.56pc of its total assets and 14.4pc of total deposits.

"The increase should be a bit concerning," says Abdulmena, who sees this portfolio "well managed" compared to other banks.

Despite Dashen's shrinking capital adequacy ratio, nonetheless, it has remained at a level twice higher than the legal requirements. This is no surprise, for, almost all the private banks have CAR double the amount legally required. This is due to bankers' overcautious approach to their business in a bid to fend off regulatory surprises, according to the veteran banker.

Another area where Dashen Bank has seen a decline is in its non-interest income from foreign exchanges dealing. It has shown a huge drop of 31.8pc, and stood at 265.3 millionBr.The decline should be worrying when compared to 2009/10 figure of 309.6 million Br, a decrease of 14.3pc.

It is not a decline exclusive to Dashen Bank, however. Dwindled gains from export proceeds are phenomenon observed in other private banks; the five banks that have declared their respective statements this year have suffered a combined loss of 82 million Br in 2011/12, compared to the previous year.

"This is due to declines in export performance because the country's export destinations, such as Asia andEurope, are currently facing financial turmoil," says Asfaw Alemu, vice president of Dashen Bank. "Remittance too declined because of the financial crises in the United States andEurope."

It was also a year where Dashen has incurred total expenses amounting to 832.1 million Br, representing an increase of 27.56pc. Of these, 410.23 million Br was paid to depositors in interest, jumping up by 26.12p, while the increase in saving and time deposit was only half this amount.

This must have been due to macroeconomic factors as well as stiff competition among banks, Abdulmena observed.

Indeed, banks have been under cut-throat competition among themselves to mobilize deposits from the public in a market where the state owned Commercial Bank of Ethiopia (CBE) has deployed aggressive strategy and expansion in recent years. Dashen Bank, for instance, pays up to eight per cent in interest, three percentage points more than the legal threshold.

"Even if we are in a stiff competition with the CBE, we have a strategy to bring more unbanked people in the community to the system," Asfaw told Fortune.

The combination of stiff competition to win depositors and high interest payments might have been reasons behind Dashen's declined liquid assets both in absolute and relative terms, Abdulmena observed.

Dashen's cash and bank balances went down to 5.7 billion Br on the reported year, from 6.2 billion Br, despite its assets expanded by 19.89pc and reached 17.52 billion Br. Liquid assets to total assets ratio dropped to 32.96pc, from 42.6pc; liquid assets to deposits ratio has gone down to 41.06pc, from 52.57pc; and liquid assets to total liabilities ratio has declined to 36.8pc, from 47.09pc.

"But, they have to closely monitor the situation," Abdulmena told Fortune.

Dashen Bank has a liquidity management committee that monitors liquidity position and reports to the top management on daily basis, affirms Asfaw.

"At this moment, we aren't worried over the liquidity of the Bank," he told Fortune. "This doesn't mean, however, that we aren't concerned. We have a plan to maintain deposit mobilization through cost effective ways."

Dashen has hired independent consultants to develop a strategy to identify new market for deposits, away from the current business practice of poaching depositors and exporters, Fortune learnt.

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