18 November 2012

Ethiopia: United Bank Profits While Shareholders' Return Stays Same

Despite registering a 297.9 million Br profit after tax in 2011/12 fiscal year, the Earning per Share (EPS) of United Bank stayed the same, hovering at 52.8pc as the result of the difference in the rate of increase of the profit after tax and the paid-up capital.

Although the bank's paid up-capital increased by 11pc to 580.9 million Br, the increase in profit was much greater, showing a 28.5pc increase.

The strength of the bank is not only about the profit achieved on the financial front in the fiscal year, it was also about the foundation on which the bank is building itself, said Getachwe Ayele board chairman of the bank at the 14th general meeting of shareholders at the Hilton Addis on November 13, 2012.

During the last fiscal year, the total capital of the bank, which comprised of paid up capital, legal reserve, retained earnings and premium on shares, stood at 1.1 billion Br, showing a 22.2pc increment compared with the previous year. The bank, which was established in 1998, also managed to increase its paid-up capital to 580.9 millionBr.

Our main focus is to strengthen the bank by building its capital, Berhanu Getaneh, president of the bank told Fortune. Even if it may erode the shareholders return in the short term, the bank's centre of attention will stay the same.

Most of the shareholders' who attended the meeting endorsed this strategy of the bank, which focused on raising the bank's capital to win over future challenges.

Although shareholders" return does not show increment from the previous year, we are happy because our bank's capacity to meet its liabilities and other risks such as credit and operational risks is improving time to time, Samson Leuleseged (Eng), one of the shareholders of the bank told Fortune after the meeting ended.

Even if the current level of the bank's Capital Adequacy Ratio (CAR), which stood 21.5pc in 2011/12, slightly drops from its prior year figure, it is more than twice the legal requirement.

Similar to the capital status of the bank, liquidity level has also declined as confirmed by various liquidity ratios.

Liquid assets to total assets ratio declined to 32.6pc in 2011/12 from 46.1pc while liquid assets to total deposits ratio decreased to 42.5pc to 58.7pc.

The decline is attributed by the president of the bank due to the directive of the National Bank of Ethiopia (NBE) that compels banks to invest 27pc of gross loan disbursement in five-year NBE bonds.

All private banks operating in the country have to purchase three per cent interest bearing bonds amounting to 27pc of each loan they advance, according to the central bank directive.

The bank' has invested 1.1 billion Br in NBE five year bonds in 2011/12 fiscal year, which accounts for 18.2pc of the total assets of the bank.

To minimize the pressure that arise from this requirement, we are focusing on deposits mobilization, according to Berhanu.

The bank, which were giving service with a total of 68 branches managed to mobilize 6.8 billion Br from depositors, which grew by 11.4pc compared with the previous year. Out of the total deposits, saving deposits took the lion's share accounting for 62.3pc while demand and time deposits accounted for 26.7pc and 11pc, respectively.

This performance improved the bank's loan to deposits ratio from 52.5pc to 59pc even if the amount of loan disbursed by the bank rise by 24.7pc in 2011/12 fiscal year.

The outstanding loans and advances balance of the bank stood at 4.1 billion Br last year, showing a growth of 808.4 million Br over previous year same period performance and earned 515.7 million Br interest income for the bank.

The interest income, which accounts 62pc of the total income collected by the bank increased by a staggering 52.2pc during the year whereas non-interest income has increased by a modest 8.4pc to 312.9 million Br.

Even if the non-interest income items such as commissions, fees and charges have shown a decent raise by 29.3pc, the increase has been eaten up by a decline in foreign exchange dealings income by 20.3pc to 265.3 million Br in 2011/12. This figure is even less than the income from foreign transaction dealings in 2009/10, which amounts to 388.9 millionBr.

Even if the decline in foreign exchange dealings income is industry wide phenomenon due to macroeconomic factors and stiff competition among local banks, the bank should analyses this trends and design appropriate strategy to protect its market, according to Abdulmena Mohammed, accounts manager for Portobello Group Ltd, a London-based holding company with subsidiaries in property investments and developments.

The president of the bank agrees with the expert opinion.

The financial crises and high rate of unemployment rate in the developed countries affected not only United Bank but also the entire nation, said Berhanu.

In the future we are planning to strengthen our deposits mobilization efforts and implement more cost redaction strategies, he added.

United Bank spent 52pc out of its total operating expense on staff and administration expenses. This figure showed a 41pc increment compared with the previous year.

This indicates that United has incurred staff and administration expense of 21.7 cent to generate one birr. Although, this spending is lower than last years figure of 24.9 cent, it is still around the industry average, which stood at 20.2 cent in 2010/11.

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