25 November 2012

Ethiopia: Zemen Reports a Marginal Two Percent Growth in Profit After Tax

Zemen Bank reports only a two per cent increase in profits after tax for the year 2011/12, a year when most other banks have reported significantly higher performance over the previous year.

The 86.37 million Br profit has not been helped much by the 22.49pc growth in its total income, which stands at 266.62 million Br for the year, largely because its expenses have gone higher by a doubling of workforce during the year, according to Tsegaye Tetemke, president of the Bank. The previous year's report was also boosted by foreign exchange earnings related to the devaluation of the Birr.

Among other banks that have released their reports ahead of Zemen, Lion International, two years older than Zemen, has stated 75.31 million Br in profit, higher by 72.2pc than its performance the previous year. Oromia International Bank, in operation since 2008, has also reported 49.4 million Br in profit, up by 23.7pc.

Zemen's expenses currently stand at 143.31 million Br, up by 48.8pc. Increased interest expenses have eaten up Zemen's total income, reflecting poorly on the profit, according to Abdulmena Mohammed Hamza, accounts manager at London-based Portobello Group.

Interest expenses and staff and general administration expenses, reached 66.12 million Br and 70.54 million Br, respectively, increasing by 61pc and 41pc.

A nine million Birr provision for an outstanding legal case, included in the general and staff administration expenses, has also reduced the profit by 10.4pc. This provision was held in connection to the sale of shares worth 100 million Br last year, which have since been voided by a first instance court.

The shares were sold in line with shareholders decision at a meeting on September 17, 2011, to raise the Bank's paid-up capital from 149.56 million to 450 millionBr.

However, two shareholders filed suit contesting the way this decision and two others were approved, claiming normal procedure was not followed. The court had ruled in their favor when it gave a decision in July 2012.

The Bank had filed an appeal afterwards to the Federal High Court, and included the 100 million Br paid-up capital it had raised in the final draft of the audit report. Meanwhile, though, the Bank included the 100 million Br raised by the disputed sale, indicating 249 million Br for paid-up capital, and kept nine million Birr provision for litigation.

But shareholders who had viewed this draft in advance complained to the board and management to adjust the high paid-up capital. After holding discussions, the board had given in and adjusted the paid-up capital entry for the Bank back to 149 million Br, this past week, days before the report was to be presented.

The special provision was, however, kept for shareholders who had bought the contested shares and may demand compensation.

The board and management proposed to sell shares worth 200 million Br on Saturday, November 24, 2012, in order to make up for last year.

Despite higher expenses affecting its profit, Zemen's income from interest have grown by 69.59pc, reaching 102.83 million Br whereas non-interest income, accounting for more than 60pc of Zemen's income, increased by only 4.3pc and reached 163.79 millionBr.

On the other hand, income from foreign exchange declined by 12.5pc for Zemen. However, this is a very good performance, according to Abdulmena, since last year's income from foreign exchange was exaggerated due to the devaluation of the Birr. When compared to foreign exchange income from two years ago, it has gone up by 32.58pc.

Zemen has proved to be a top performer in terms of foreign exchange income, says Abdulmena.

"The Bank should capitalise on this area of strength and achieve better returns," he recommends.

The management of Zemen attributes such performance to the kind of clients it has.

"We have a lot of exporters as clients, and these exporters usually trade in items that are always in season like flowers," Tsegaye told Fortune.

Zemen has shown improvement both in deposit mobilisation and loan disbursement. The Bank mobilised 1.793 billion Br in deposits, increasing last year's performance by 54pc. Almost 78c of this is time and saving deposit, which cannot be withdrawn for a certain term, and hence get a higher interest income.

"Zemen is hugely reliant on time deposit which costs it higher than other banks," Abdulmena stated.

Most private banks keep time and saving deposit under 70pc of total deposit collected, which is an action Zemen should follow, according to him.

Loan disbursements for Zemen increased by 56.93pc, reaching 994.56 millionBr.The loan to deposits ratio improved slightly this year for the Bank

Loan to deposit ratio for Zemen currently stands at 55.47pc. This is lower than other banks of similar size and also the industry average. The recommended level of loan to deposit ratio is 70pc.

"Zemen should look for ways to improve this ratio," Abdulmena recommended.

Although the National Bank ofEthiopia's (NBE) directive, which requires private banks to invest in five-year NBE bonds, has affected its liquidity, Zemen is still a strong performer in this aspect, according to Abdulmena. Zemen has invested 390.68 million Br in bonds, which accounts for 21.79pc of deposits and 16.32pc of assets.

These declines have also affected other banks as a result of the NBE directive.

Cash to deposit ratio for the Bank has decreased to 46pc from 60.82pc and cash and liabilities ratio decreased to 34.46pc from 43.8pc.

The Bank is currently offering Earnings per Share (EPS) of 58pc of par value, an amount it has also offered last year. Along with capitalisation, the Bank should also work on a similar growth in profits after tax, in order to prevent the decrease of shareholders' returns, Abdulmena advices.

"The management of the Bank should seriously think about developing a strategy of at least maintaining the current level of returns" Abdulmena told Fortune.

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