16 March 2017

Zimbabwe: ZB Financial Holdings' Bad Loans Surge

ZIMBABWE Stock Exchange listed integrated financial services group, ZB Financial Holdings' bad loans have risen by 8,3 percent to 23 percent, putting into question the bank's credit management system and strategy.

The bank was saddled with US$26 million in bad loans as at the end of 2016, compared to US$24 million reported in the prior year.

This means that bad loans as a percentage of outstanding loans rose to 23 percent during the full year to December 31, 2016, from 20 percent reported during the same period in prior year.

This constitutes one of the highest bad loan proportions in the local banking sector.

It also exceeds a 10 percent threshold for the sector put in place by the Reserve Bank of Zimbabwe (RBZ).

Generally, the level of non-performing loans (NPLs) in the banking sector has been declining from a peak of 20,45 percent in 2014 to 7,8 percent as at December 31, 2016.

Analysts this week questioned the quality of ZB's loan book.

One analyst who declined to be named had this to say: "It's one of the biggest in the banking sector and it doesn't paint a good picture. The worrying thing about ZB's position is that it has been difficult for them to offload the NPLs to the Zimbabwe Asset Management Company (ZAMCO), which in my view appears not to be sure about the quality of these loans. This means these loans are of substandard quality."

The surge in bad loans and the bank's failure to off load some of the poorly performing loans to ZAMCO has forced ZB to create a special purpose vehicle (SPV) called Credsave (Private) Limited to assume the non-performing loans.

The bank's group chief executive officer, Ron Mutangagayi, told analysts after presenting the group's full year results to December 31, 2016 a fortnight ago that the financial institution was now courting investors to buy the bad loan book, probably at a discount.

Mutandagayi said: "We got approval from the Reserve Bank of Zimbabwe to establish a special purpose vehicle called Credsave (Private) Limited, which will house NPLs. We have already transferred NPLs with a net value of US$9,6 million to the SPV. The security coverage on these assets equates to 141 percent. The search for suitors is underway."

He added: "The increased NPLs ratio in 2016 was a result of the interest accumulation on previously downgraded loans and further down grading of accounts during the year. The ratio remains amplified due to the lack of growth in the lending book."

By creating a separate vehicle for its bad loans, ZB wants to give its balance sheet a semblance of health.

But analysts said the move by ZB to create a "good and a bad book" was just a form of creative accounting that would have little positive results.

Bad loans have been the biggest threat to banking sector stability in the country.

At one stage, NPLs in the banking sector reached close to US$1 billion or 20,14 percent of total sector loans.

The RBZ, however, established ZAMCO to purchase NPLs that had the potential for recovery, and as a result, the amount of bad loans declined.

They are also expected to drop further since there is now a credit reference bureau, which was established by a credit checker called Creditinfo from Czech Republic.

The project, which went live in January this year, is expected to improve credit risk management in the financial sector.

Last week, ZB reported a US$11,43 million profit during the year to December 2016 from US$9,36 million recorded in prior year, representing a 22 percent increase.

Despite a fall in earning margins due to the RBZ's continued pressure on the cost of credit, ZB's total income increased by 12 percent to US$65,07 million during the period under review, from US$57,99 million reported in the prior year.

Mutandagayi said this was due to robust bad debt recoveries, growth in non funded income and positive fair value performance in listed equities.

Gross recoveries on non-performing loans amounted to US$4,6 million.

Non-funded income remained the major income earner with the non-interest income ratio standing at 73 percent at the end of December 2016 compared to 76 percent recorded in the prior year.

Interest income ratio stood at 27 percent in 2016 compared to 24 percent reported in 2015. The increase was due to increased trading in treasury bills (TBs).

The loss of interest income from lending activities was compensated by the earnings from the TB portfolio to achieve a flat net interest outturn.

The financial results showed a 15 percent growth in TBs from US$99,3 million recorded in prior year to US$117,5 million.

This was attributed to purchases in the secondary market as an alternative asset in order to maximise short-term returns.

Many market watchers, however, believe that prudent banks don't rely on interest from TBs because treasury instruments are not sustainable.

The loans to deposit ratio declined marginally as deposits increased marginally at two percent while the loan book remained flat.

The group's liquidity ratio in 2016 was 75 percent against 60 percent reported in prior year.

This means the group has consistently surpassed the minimum regulatory requirement of 30 percent.

The return on equity ratio was 13,4 percent during the period under review compared to 12,6 percent, meaning there was improved efficiency in capital utilisation in 2016.

ZB's total expenses grew by seven percent from US$46,32 million to US$49,46 million due to higher technology related costs, depreciation and amortisation arising from related investments.

All strategic business units operated profitably during the period under review with the banking operations contributing 85 percent of profits while non-banking operations contributed 15 percent.

Despite the challenging environment, the group was able to grow its asset base underpinned by the 15 percent growth in TBs and a 47 percent increase in cash and near cash balances.

Total assets grew by five percent to US$439,3 million during the period under review from US$417,6 million reported in prior period.

But analysts said ZB's asset quality "was not exciting".

"The concentration risk of treasury assets, which the bank continues to accumulate, is a worrisome thing," one analyst who preferred not to be named said.

"I don't think banks are valuing TBs correctly. ZB is holding US$117,5 million worth of toxic assets. They don't trade at face value but if they are to trade, there should be huge discounts. What it means is that ZB is portraying a position which is not there. If depositors call their money, the treasury instruments don't trade at face value and the bank would not realise US$117,5 million. Therefore, there is a huge financial gap ZB don't realise."

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