22 July 2017

Ethiopia: Bidders Offer Twice the Par Value for Berhan Shares

Berhan International Bank, one of the late entrants in the banking industry, kept receiving inflated offers in its second round of share auction held on July 20, 2017, witnessing the highest offer of 2,000 Br per share.

Berhan, whose shareholders are 15,000, availed 12,260 shares for public subscription worth 12.2 million Br. Like similar auctions at any other financial institution, the bidders in the second round of auction at Berhan were willing to put up a high bid for a small lot of shares.

The recent highest offer, which is duble the par value, is two times lower than the highest bid recorded during the first round of auction of shares returned by foreign nationals of Ethiopian origin three months ago.

The highest offer was given by Enanawork Desalagen and Mesfin Hayleyesus, who competed to buy 201,000 Br worth of shares each. The lowest bid came from Tedros Tesfaye for 20 shares with 1,000 Br.

The share auction was the result of the directive released by the National Bank of Ethiopia (NBE) eight months ago, which forbids foreign nationals to own shares in any financial institution in Ethiopia. At that time, the banks were instructed to pay the foreigners their dividends and share value then auction their shares.

Since then, almost all financial institutions have put up foreign owned shares for auction, receiving the highest bid of 26 and 20 times that of par value - an attempt offered to the Bank of Abyssinia and Awash Bank, respectively, which are the record-high offers seen in the banking industry so far.

However, the highest offer seen at Berhan is almost similar with a trend seen in peer banks. Bunna Bank, which was established the same year as Berhan in 2009, brought in a highest bid of twice its par value three months ago.

Nevertheless, the higher bid presented at Berhan seems to be an unwise move for some banking industry insiders who have observed a fall in the dividend in the financial sector in the past half a decade.

"Considering the past five years' average dividend of the Bank, the offer is overvaluation," said Abdulmenan Mohammed, an expert with over 15 years of experience in auditing and finance in Ethiopia and the United Kingdom.

An executive at Berhan Bank, who has more than a decade of experience in the banking industry, agrees with Abdulmenan.

"Such offers indicate the bidder does not understand how the financial industry works," he said. "It seems like the bidders give such offers for the sake of joining the banking industry, instead of gaining a return."

With the exception of the past year's hike in earnings per share, the average dividends per share (DPS) of Berhan has been slightly over 150 Br over the past five years. Last year, the figure doubled to 300 Br.

"If the Bank pays the same DPS as last year, any offer over 60pc of a par value, including the highest offer at Berhan, is insensible," said Abdulmenan. "Based on the past six years' trend, the return of the bidder won't be beyond nine percent annually."

On the other hand, the Executive of Berhan suggests that an offer given in any of the banks in the country should not be any more than 25pc of the par value.

"For a country whose financial industry is in its infancy, committing to beyond this amount does not make any sense," he said.

The Bank, which commands around seven percent of the industry's profits, has earned half a billion Birr in gross profit during the recently ended fiscal year, according to its unaudited report.

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