4 November 2012

Ethiopia: The Youngest Bank Rivulets in Profit in Full Year Operation

In its first full year operation since its founding, Abay Bank has announced a net profit of 24.2 million Br. However, its annual report contains couple of unusual glitches in its accounts presentation, according to audit experts.

The Bank, one of the youngest entrants to the financial market, has registered positive results in a backdrop of nearly 3.8 million Br losses recorded in its half-year operation the previous year.

Abay Bank has had its annual shareholders' meeting in Bahir Dar on October 27, 2012, one of the financial institutions to hold such an event outside of the capital. In light of several of its major shareholders based in theAmharaRegionalState, this ought to be hardly surprising. Abay Bank was licensed by the central bank in July 2010, registering 157.8 million Br in paid up capital mobilized from 823 founding shareholders, including major ones such as Dashen Brewery S.C. (7.5 million Br), Amhara Water Works Construction Enterprise (7.5 million Br), Housing Development Agency of Amhara Regional State (7.5 million Br), Amhara Design & Supervision Works Enterprise (7.5 million Br), Amhara Region Urban Development & Construction S.C. (7.5 million Br), Gozamen Farmers' Cooperative (2.5 million Br), Amhara Development Association (4.5 million Br), Tikur Abay Transport S.C. (4.5 million Br), and Sebhatu & Sons Property Administration & Security Plc (one million Birr).

Addressing shareholders, Tadesse (Tinkishu) Kassa, chairman of board of directors, attributed the Bank's gains last year to "appropriate planning, full scale implementations of technology, and efficient organizational development."

"Our efforts to incorporate innovations in our strategy and product offerings proved successful," Tadesse declared to shareholders. "We surpassed expectations for the year."

Shareholders were rewarded a 7.1pc earnings for a share (EPS), although the Bank has made a 12.1pc in EPS, significantly lower than the 37.3pc industrial average for fiscal year 2010/11. Industrial average on earnings per share for last fiscal year is yet to come by, for, many banks are lined up to issue their financial records in the weeks to come. To date, Buna Bank has registered a 13.3pc EPS from its operations of 2011/12, while Nib International Bank (NIB) paid its shareholders 34.4pc dividend.

Shareholders of Abay Bank earned such dividend despite an increase of 81.2 million Br in paid-up capital from the previous fiscal year, reaching at 239 million Br, still a shortfall by half from what the central bank wants to see banks capitalized in the year 2016.

Although boosting paid-up capital may have affected returns for shareholders, it has a positive impact if it is managed well, Molla Mengistu (PhD), director of Business Development & Communications Department, told Fortune.

The increase in capital makes Abay Bank one of highly capitalized banks in the industry, considering its Capital Adequacy Ratio (CAR), which stood at 58.4pc in 2011/12 fiscal year, according to Abdulmena M. Hamza, an accounts manager at theLondonbased Portobello Group.

The Bank has been investing a portion of its paid-up capital to enhance its position in the market, particularly in information technology (IT) infrastructure, according to Molla.

The National Bank of Ethiopia (NBE) requires all banks operating in the country to install CORE banking solutions in its bid to see them all interface with its National Payment System (NPS).

Abay Bank had selected Oracle in August 2010, to install its CORE banking solutions, which was completed last year, networking its 26 branches. TheUnited Statesfinancial service company Oracle was paid around 250,000 dollars for its licence fee.

It is an investment senior managers at Abay Bank credited the successful deposit mobilization drive that has seen an increase of 195.7pc from the previous year, reaching at 778.9 million Br. Abay Bank has managed to disperse 294 million Br in loans and advances last year.

Close to 32pc of this disbursement goes to domestic trade, followed by the construction and export sectors, which account for 29pc and 10pc, respectively.

However, average deposits mobilized and loans disbursed by each branch of the Bank revealed that increases on both accounts are directly related to branch expansion than improvements made in each branch's performance, according to Abdulmena.

The average loan collected by each branch in 2011/12 stood at 17.4 million Br, from 17.6 million Br a year before, while average deposit has increased to 30 million Br, from 29.3 million Br, in 2010/11.

"Abay Bank must benchmark its key areas of operations such as deposits mobilization and loan disbursements in each branch against similar sized banks to improve its performance," says Abdulmena.

It is a recommendation positively viewed by the Bank, Molla told Fortune.

"In addition to expanding our branch network to 50, we are planning to introduceMobileand ATM banking in order to enhance our deposit mobilization and loan disbursement abilities," said Molla.

Expansion of branch network will continue to be the centre of Abay Bank's business development strategy, Tadesse told shareholders in Bahir Dar.

Abay Bank has spent 175.6 million Br to purchase bills from the central bank during the fiscal year, which constituted 22.5pc of its total deposits, and earning it 3.5 million Br in interest. Both interest and non-interest incomes have gone up significantly. The first has seen an increase of nine folds to reach at 42.7 million Br, while non-interest income increased by seven folds and stood at 54.1 millionBr.Of the total non-interest incomes, the lion share, 37 million Br, was generated from commissions in domestic business activities.

This is commendable as most other banks have their main source of non-interest incomes from import-export related activities, which has proven to be volatile, according to Abdulmena.

What is seen as not commendable in the annual report was, however, oversight in calculating earnings per share from the total capital registered in the year, recorded in the profit and loss statement as 50.54pc. This ought to have been corrected or qualified by the auditors, TMS Plus, for it should be calculated rather considering the annual average capital, Abdulmena told Fortune.

Managers at TMS Plus, a category "B" audit firm, have declined to comment on why they chose not to qualify the report in their opinion, claiming confidentiality clause with their client. They have also refused to comment on the unusual recognition of 79.2 million Br as liabilities in the balance sheet, ending at June 30, 2012, from inter-branch account.

Although senior managers at Abay Bank argued including inter-branch account is nothing extraordinary practice, audit experts say otherwise.

"It should have been reconciled to liabilities and assets," Abdulmena told Fortune.

Inter-branch accounts of any bank ought to have come to zero when accounting for the year is done, according to a senior audit expert in the industry. Although it is an oversight that has no effect in the overall standing of the Bank, it reflects poorly on the manner the accounting was conducted, he said.

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