Sunday, July 11, 2010

BASEL II IMPLEMENTATION IN ZIMBABWE – CHALLENGES AND OPPORTUNITIES FOR THE LOCAL BANKING SECTOR

Introduction
Other countries especially in the developed world have made great strides in implementing Basel II over the past 8 or so years since Basel II was released by Bank of International settlements (BIS) in 2004. Countries in the European Union, Australia, the United Kingdom, Singapore, South Korea, Hong Kong, New Zealand and South Africa have already adopted Basel II’s Advanced Approaches for Credit Risk and Operational Risk and Advanced approaches for Market Risk. In comparison, Zimbabwe has lagged behind full implementation of Basel II.

Basel II has not been without its challenges with a lot of criticism coming in the wake of the recent subprime crises which have led to various players which include analysts, regulators and accountants asking the hard questions about the relevance of the Capital Accord in ensuring financial stability and adequate capital being held by banking institutions to cover losses commensurate with their risk profiles.

Background to Basel II
Although Basel II has been with around for a while, it remains unclear to some professionals in financial markets especially in countries where it has not been fully implemented. A brief background can assist in this regard. The Basel Committee on Banking Supervision was established by the central bank Governors of the Group of Ten countries at the end of 1974 and its secretariat is based in Basel. The Committee develops policy guidelines that each country's supervisors can use to determine the supervisory policies they apply.

The Basel Committee's most important work is in the area of setting minimum capital standards for banks worldwide. Supervisors have long sought to ensure that banks maintain adequate capital to cover all risks. In 1988, the Basel Committee agreed on the 'International Convergence of Capital Measurement and Capital Standards', more commonly known as the Basel Capital Accord or Basel I.

Basel II replaced Basel I in 2004 after regulators realised that there were some weaknesses in Basel I but it should be noted that essentially Basel II built upon the successes of Basel I. The objectives of Basel II: “International convergence of Capital Measurement and Capital Standards: A Revised Framework” were:
to continue to promote safety and soundness of the banking system through maintenance of the current overall level of capital;
to provide a comprehensive approach to measuring different banking risks;
to continue enhance competitive equality;
to increase the effectiveness of operational risk quantification;
to better align regulatory capital to underlying risks;
to promote a national supervisory and regulatory process to ensure the maintenance of adequate capital;
to increase the information integration across the whole business to manage market, credit and operational risks;
to provide incentives for banks to further improve their internal risk management systems; and
to focus on internationally active banks but also suitable for banks of varying levels of complexity and sophistication.

Key differences between Basel I and Basel II are reflected below:
FOCUS
BASEL I
BASEL II
Risk measure
Single risk measure applied. Basel I mainly dwelt on providing capital for credit risk as lending was considered to be the predominant function of banks at that time.
More emphasis on banks’ own internal methodologies, supervisory review, and market discipline
Risk sensitivity
Broad brush approach
More granular and more sensitive to risks
Credit risk mitigation
Limited recognition
Comprehensive recognition
Operational risk
Excluded
Included

Flexibility
Adopted a one size fits all approach and this had unfavourable consequences on capital assessment.
Flexibility and menu of approaches in recognition of differences in sophistication between banks and countries

Basel II focuses on 3 pillars which are mutually reinforcing. These are: (a) Pillar 1 - minimum capital requirements, (b) Pillar 2 - supervisory review process and (c) Pillar 3 – market discipline.

Pillar 1: Minimum Capital Requirements - defines the minimum capital requirements for key banking risks, which seek to refine the standardised rules set forth in the 1988 Accord. It allows bank to adopt appropriate approaches, from a menu of options, to deal with Credit, Market and Operational Risks. This pillar links, to the extent possible, the amount of required capital to the amount of risk taken. The revised framework tries to match the regulatory capital as defined by regulators to economic capital as determined by banks’ internal processes.

In measuring capital adequacy, an institution needs to determine its Capital Adequacy Ratio. The Capital Adequacy Ratio (CAR) is the ratio of regulatory capital on the liability side of the bank’s balance sheet to the sum of the bank’s risk-weighted assets. According to Basel I and Basel II this ratio must be at least 8%[i].

Buildig upon the foundation of Basel I, Basel II introduced three distinct options for the calculations of credit risk, market risk and operational risk which is important for determining a bank’s risk-weighted assets.

Credit Risk
Operational Risk
Market Risk
Standardised Approach
Basic Indicator Approach
Duration
Foundation IRB Approach
Standardised Approach
Earnings at Risk
Advanced IRB Approach
Advanced Measurement Approaches (AMA)
Value at Risk

Pillar 2: Supervisory Review Process - defines the supervisory review of an institution's internal assessment process and capital adequacy (ICAAPs). The review not only ensures that the banking institutions have adequate capital to support all the risks in the business, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. This pillar allows supervisor-bank dialogue on the measurement and management of risk and the connection between risk and capital.

Management of capital is important for both regulators and banks including accountants. IAS1:134, Presentation of Financial Statements requires an entity to disclose information in the financial statements that enables users to evaluate the entity’s objectives, policies and processes for managing capital.

Pillar 3: Market Discipline - details minimum levels of public disclosure, leading to greater transparency and accountability from bank management. This pillar aims to strengthen market discipline as a complement to supervisory efforts by increasing the transparency of a bank’s risk-taking activities to the customers and counterparties that ultimately fund and hence share these risk positions.

Already there is talk about Basel III after regulators and financial services sector participants noted some weaknesses in Basel II in light of the subprime crises of 2007 to 2009. This only shows that risk and capital management practices evolve over time and key lessons learnt from various economic and global developments will always influence the reactions of regulators, standards setters and politicians in addressing emerging challenges.

Progress made in Basel II implementation in Zimbabwe
Zimbabwe has lagged behind full implementation of the Accord although a lot of progress has been made in gradual implementation of components of the 3 pillars of Basel II[ii]. Recently, the Reserve Bank of Zimbabwe published a Technical Guidance on Basel II implementation in Zimbabwe in April 2010 soliciting comments from market participants and other players such as auditing firms and analysts.
This guideline outlines the methodology and requirements for implementing Basel II in Zimbabwe. It deals with definition of capital, the calculation of the minimum capital requirements (Pillar I) for credit risk, operational risk, and market risk; supervisory review (Pillar II) and market discipline (Pillar III). Definition of capital is quite key with regulators setting caps for various components of capital. This sometimes causes challenges with accountants not agreeing to the various caps and definitions of Tier 1, Tier 2 and Tier 3 capital[iii]


Challenges for the local financial sector in implementing Basel II
Implementation of Basel II in various countries has been associated with a number of challenges associated with any large project implementation process. Fully aware of the practical aspects of implementing a more modern, complete and risk sensitive prudential framework, the Basel Committee published, in July 2004, i.e. directly in the wake of the New Capital Accord, a document entitled “Implementation of Basel II: practical considerations”[iv].

Already the Technical Guidance issued by the Reserve Bank of Zimbabwe[v] requires that the core capital of a banking institution should exceed 50% of the capital base of the institution. Although this is meant to strengthen the capital base of an institution, it might be a challenge for local financial institutions to meet these requirements.
An analysis of countries across the world that have fully or partially implemented Basel II has revealed that compliance with Basel II is fraught with the following challenges:
· Lack of resources and qualified personnel in modern risk modelling approaches: Banks are required to make relevant budgets for Basel II implementation and this should cover IT requirements and all the training requirements. In some instances banks have been hiring consultants to assist them with Basel II.
· It is a fact that there are few professionals in Zimbabwe with qualifications such as CFA, PRM and FRM which are important risk qualifications laying the foundation for easier implementation. Most of those that have acquired such have left the country in search of greaner pastures.
· Executive ownership and change management: Implementing Basel II will require high level management commitment and may require changes to risk management in any institution. Typically a project management team reporting to the Managing Director and the Board will have to be in charge of the implementation process. Hard questions on internal impact, customer impact, business impact, regulatory impact and market impact will need to be asked throughout the implementation process and post implementation.
· The complexity of the New Accord, as well as its interdependencies with other significant regulations, makes implementation of Basel II a highly complex corporate governance/risk management project necessitating a structured and disciplined approach[vi].

· High operational and compliance costs which favour large banks which are able to bear such costs and benefit from economies of scale.
· Non-availability of high quality data is a challenge to the effective implementation of Basel II. Lack of sufficient data negatively impacts on calibration and benchmarking of models. The uncalculated, over-estimated/underestimated risks can nullify the whole efforts of Basel II implementation.
· Limited reliability of the ratings done by rating agencies defeats the purpose of enhancing market discipline. Credit rating agencies have come under fire in light of the recent sub-prime crisis with some jurisdictions such as the US mooting the idea of regulating such rating agencies.
· Sector-specific implementation of Basel II: In many developing countries, only banks are required to comply with Basel II, and not other financial services providers such as securities firms and the insurance sector. The Technical Guidance on Basel II Implementation in Zimbabwe applies to both banking institutions on a solo as well as banking groups on a consolidated basis.
· Regulatory arbitrage in banking operations across jurisdictions. These arise because of different implementation time tables, different approaches to implementation and different interpretation of Basel II.
In Zimbabwe, post implementation period will involve both regulators and banks monitoring the use of the new approaches with the objective of optimising their major objectives from their different points of view.
Benefits and Opportunities of Basel II Implementation
Implementing Basel II in the local sector offers various benefits and opportunities for the local financial services sector.

Pillar 1 of Basel II stipulates down a specific calculation of regulatory capital to set against credit risk transfer transactions (such as securitisations and credit derivatives). This treatment set out in Basel II thus aims to ensure that securitisation transactions have their own economic reality, rather than seeking regulatory arbitrage as was sometimes the case under Basel I.

Secondly, by reinforcing the link between the capital base and the risks actually incurred, Basel II encourages banks to improve their systems for managing these risks as well as their due diligence procedures.

Thirdly, Basel II gives banks and supervisors a vital tool, Pillar 2, with which to assess the risk profile of institutions and in particular to take account of certain risks that are sometimes difficult to quantify but whose impact can be great such as interest rate risk, refinancing risk and reputational risk.

Fourthly, Basel II sets out to promote stress tests as one of the tools for managing and assessing risks. Basel II stipulates that the stress tests conducted by banks must incorporate the effects of a large increase in credit and market risks as well as those of a rise in liquidity risk. The aim is to ensure that banks hold sufficient capital to absorb severe shocks.

Lastly, Basel II aims to substantially reinforce transparency and market discipline. Pillar 3 of the framework lays down numerous requirements regarding the disclosure of qualitative and quantitative information about capital and risk, including in respect of risk transfer transactions.
Overally, Basel II, will assist banking institutions to better assess and manage risks linked to securitisation transactions and to improve their financial reporting, two crucial areas in which the 2007-2009 global financial crisis have highlighted that significant progress needs to be made.
Conclusion
With the rapidly changing developments in global financial markets and financial innovation, local financial institutions will need to continue investing in robust management of capital, improving risk management structures and practices commensurate with their risk appetite.

There are significant benefits for the local sector in implementing Basel II and to this end open comunication on implementation issues and challenges between the sector and the Reserve Bank of Zimbabwe will be important going forward.

Banks with international presence will find it easier to implement Basel II in Zimbabwe by sharing information with their peers in other parts of the world therefore benefiting from economies of scale.

The local market and regulators will need to continue monitoring developments and ammendments to Basel II issued by Bank of international settlements (BIS) to ensure timely adjustments are done to the local sector.

References:
[i] Bank of France (November 2003), Financial Stability Review, Financial stability and the New Basel Accord.
[ii] Reserve Bank of Zimbabwe (January 2009), Monetary Policy Statement, Page 55.
[iii] PricewaterhouseCoopers (April 2010), Responses to Basel Committee on Banking Supervision: Consultative proposals to strengthen the resilience of the banking sector.
[iv] Bank of France (December 2007), Speech by Governor of the Bank of France before the Bank of Algeria and Algerian Financial Community.
[v] Reserve Bank of Zimbabwe (April 2010), Technical Technical Guidance on Basel II Implementation in Zimbabwe.
[vi] KPMG (2003), Basel II, A Worldwide challenge for the Banking Business.

Dony Mazingaizo, ACCA, has interest in IFRS and financial management.

Wednesday, June 2, 2010

Zimbabwe not immune to the Eurozone Crisis

The ongoing Eurozone crisis has revealed the fragility of intergrated global financial markets. The pound and euro currencies have weekened against the United States Dollar in the recent past and the trend may continue until there is sanity and policy direction with regards to the interventions being done in Europe.
Companies holding on to Euro and Pound currencies have been posting significant exchange losses over the past 3 months losses which will definately have negative impact on profitability.
The rand is softening against the USD and this sounds to be good news for any Zimbabwean company with significant import component to its inputs.
Dony Mazingaizo has interest in IFRS and Financial Management

Tuesday, April 13, 2010

A Review of selected companies' financial performance for the year ended 31 Dec 2009 - Part 2

CBZ Holdings

CBZ profitability of USD16million was spurred mostly by net income from foreign currency dealings, fair value adjustments on investment property and revaluation gains on property plant and equipment. Total assets of the group stood at USD452.5m hence the profitability represent a ROA of 4%.
The deposits position of the bank is quite healthy standing at USD360.8m up from USD63.9m in 2008. The bank has benefited a lot from Government accounts and ZIMRA deposits since it has significant deep pockets in these customer segments.
The liberalisation of ZIMRA bank accounts in 2010 should see other banks sharing these cheap deposits too allowing them to deploy them to short term investments. Previously only CBZ, FBC Bank and Standard Chartered Bank enjoyed ZIMRA deposits. This liberalisation should even out the playing field and going forward, any bank that will do well is one that is able to have cash rich clients on their balance sheet such as Inscor and Econet!
The significant deferred tax balance of USD4.3m represents timing differences between the company’s depreciation rates and capital allowances offered by tax legislation which is in sympathy with the revaluations done and significant PPE of USD11m purchased during the year. However the note on deferred tax did not separate the deferred tax arising from investment properties and component attributable to property plant and equipment and the charge of deffered tax to the income statement is different from the amount noted in note 18.
Cost to income ratio at 63% is relatively high compared to previous years but is in line with cost to income ratio of other regional banks in South Africa.
Impairment losses represented 22% of operating income and 1% of total advances which reflects prudent advances and loan policies in light of volatile and short term deposits in the market.
Segmental analysis of the results indicates that the commercial banking arm is the biggest contributor to profit with 91% contribution to the profit before taxation of the group.
The appointment of the group board should help in better execution and delivery of group strategy. Further the integration of CBZ Building society as a division of the bank – home loans should help in benefiting from synergies such as shared services and lower capital requirements.
ZB Financial Holdings
Targeted sanctions on the group have affected customer confidence in the group. Ultimately banking is about confidence whether perceived or real.
The removal of the group from targeted sanctions by the EU block should increase confidence of customers however there is need by the USA to remove the group from the sanctions list so that the group can freely transact with other correspondent banks and access any balances tied up in the US Treasury department.
Inevitably the group had to focus on cost containment with retrenchment of staff done at a total cost of USD1.1million with total comprehensive income of USD8.5m driven largely by gains on property revaluations of USD8.5m.
The group profit was largely influenced by a good performance from the Reinsurance and life assurance SBUs which contributed 65% to the total income of the group which is in line with market trends in companies such as Afre Corporation.
The rationalisation of the group saw ZB Bank acquiring the 100% shareholding of a property investment company – Barcelona from ZB Holdings. Such a move may have been done to strengthen the balance sheet of the bank and boost the capital base of the bank subsidiary.
Kingdom Financial Holdings
Total assets as at 31 December 2009 stood at USD106m compared to total assets of CBZ Holdings of USD452m.
Post the demeger it will be interesting to see how the group will find replacement capital of USD22.5m which had been injected by Meikles Africa into the group through Reserve Bank.
Significant directorship changes have already taken place with the Appointment of Mrs L. Mukonoweshuro as GCEO. Further there has been staff retrenchments which saw the group incurring a once off cost of USD3m in packages resulting in total comprehensive loss of USD2.8m.
The cost to income ratio of the group of 121% is reflective of the loss position of the group driven largely by retrenchment costs without which the group would have made a profit after tax of USD1.5m.
Barclays Bank
Barclays bank had a total asset base of USD169m as at 31 December 2009 and total comprehensive income for the year of USD1.8m representing a Return on assets (ROA) of 1%. The income of the bank was largley driven by fee and commission income of USD10m.
The deposit base of the bank stood at USD121m compared to CBZ Bank of USD360.8m. Unlike other banks which had revaluation gains on property the bank registered an impairment loss of USD127k during the period knocking off the income statement. However there was no impairment on plant and equipment.
The offbalance sheet guarantees and letters of credit offered by the bank to customers amounted to USD18.3m which amounts to 11% of the total assets. CBZ Bank on the other hand has commitments of USD63.6m representing 14% of its total assets. This low level of exposure shows prudent management of off –balance sheet risk.

The bank needs to do more to mobilise cheap deposits and stand neck to neck with the likes of CBZ and Stanbic Bank in the market since the business environment is post survival mode and now is the time for entrepreneurs to claim their share in the competitive environment.
ZIMRE Propery Investments Limited
The company posted a loss of USD4.3m driven largely fair value loss on investment properties of USD11.3m. the company has a balance sneet of USD37m which looks inadequate to underwrite significate business in the property development sector.

The company results also reflect liquidity stress with cash of only USD0.5m. This does not augur well for major construction work and working capital needs.
However the company has ongoing construction work/pipeline projects in Masvingo, Chinhoyi, Harare and Bulawayo which should begin to add value to the balance sheet once complete

Hippo Valley Estates Limited
The company posted total comprehensive income of USD21m at the back of very strong revenues of USD59.9m. The total assets for the yead ended 31 Dec 2009 stood at USD248m representing a ROA of 8%.
However the profit of the business has an element of IAS41, Agriculture adjustments on growing crops of USD17.5m as reflected in the group cashflow statement resulting in a negative cashflow from operating activities of USD444k.
The cashflows of the group remain strong at USD4.6m at the end of the period with long term borrowings of USD2.2m which augurs well for the working capital position of the business
The removal of price controls on the local market and improved export performance to the European Union and United States impacted positively on the business operations.
CABS
CABS showed strong performance for the six months ended 31 December 2009 despite the sluggish activity in the construction sector. The company posted USD17.7m in total comprehensive income buyoed by gains on revaluation of properties of USD10.6m and fair value adjustments on investment properties of USD9.6m.
This represents ROA of 21% which is way above the 15% return on investment set by the Old Mutual group of which CABS is associated with. This return was achieved with total assets of the building society at USD86m.
This ROA is quite good given that most banks have not posted ROA of below 10% over the 12 months period ended 31 Dec 2009. One can only see even stronger performance by end of the 12 months ending 30 June 2009 for CABS.
The company has deposits of USD35m and is bound to benefit from a strong brand linked to the Old Mutual group. One wonders what the impact of the recently gazetted Indeginisation and Empowerment Act and regulations will have on the building society and Old Mutual as a group.
Dony Mazingaizo has interest in Financial Management and IFRS

Show me the money! The case of Zimbabwean Companies in their quest to recapitalise

Many Zimbabwean companies have been focusing on recapitalising their businesses and also restructuring their balance sheets in the recent past.

Companies have have had two main options i.e. equity or debt. Debt has been expensive to raise and with the liquidity challenges in the local market, many banks have not been able to provide longterm debt with a more acceptable maturity profile. Equity capitalisation has been the preferred route by many companies which include Nicoz Diamond, OK Zimbabwe, Star Africa Corporation and Art Corporation. Where debt capitalisation has been pursued, this has been utilising external funds from banks such as Banc ABC with strong balance sheets and South African financial institutions such as Investec.

Recent rights issues on the market have however reflected the liquidity constraints with the Star Africa Corporation recent rights issue subcribed to less than 30 percent showing that most shareholders could not follow their rights given the low liquidity leaving financial institutions to take the residual equity as underwriters. However OK Zimbabwe was subscribed to 70.4% by local shareholders with 29.6% taken by underwriter Investec of South Africa as per results published in the Herald Newspaper dated 14 April 2010.

Art Corporation has CBZ Bank and Interfin as the 2 underwriters of its right issue aimed at liquidating part of its short term debt by USD3.9m, reduce interest expense and bolster its working capital position. A total of USD4.67m is targeted to be raised by 30 April 2010 when the rights offer period comes to a close.
It remains to be seen how such equity will be offloaded since financial institutions are supposed to dispose of the equity holding after some time unless such an investment has been approved by the central bank.

Its most likely that the strategy is to kickstart production and at the back of improved profitability allow local shareholders to buy back the shareholding from underwriters and restore their diluted control.

It is no easy road for any local shareholder and one could say the coming of the indegenisation and empowerment act has not helped much either with so much hesitation by foreign investors to put their dollar in Zimbabwe given the peceived sovereign risk profile of the country.

Dony Mazingaizo has an interest in Financial Management and IFRS

Tuesday, March 30, 2010

A Review of the recent December 2009 Financial Performance of selected companies in Zimbabwe - Chapter 1

Introduction
This reporting season has seen a mixed bag of results from both listed and unlisted counters in Zimbabwe. The truth is that many companies are trying to get the basics right. These includes capitalisation, strategy implementation, working on the road to IFRS compliance and managing the risks associated with working in a multicurrency environment.

There is evidence that some financial sector players still have capitalisation challenges and have posted losses at the back of a subded trading environment.
Capital raising and working capital will remain a major challenge with local investors and institutions hoping to hold on to their shareholding as much as possible and as long as possible. However most will have to relinquish their comfort zones and move fast albeit in an environment of limited liquidity and financial engineering to remain relevant on the shareholding matrices of the various organisations.
ROA in the banking sector is low but the insurance sector seems to be performing well in terms of sweating shareholder capital. The returns in the banking sector seem to reflect the conservative lending attitude calibrated to the country risk profile and subdued level of economic activity in the economy.
TN Holdings
The Holding company posted a loss of USD1,1m. This is at the back of expenses incurred in bankrolling a banking project and retaining staff.

The group seems to have taken the FBC Holding Group strategy of taking over noncore business onto its balance sheet through the takeover of Tedco Company. We will wait to see how the synergy effects of this reverse takeover will takeoff.

The financials still reflect the IFRS challenges bedevling the companies of Zimbabwe. These are the redenomination of share capital, determination of deferred tax, impairment losses and devaluation of property, plant and equipment and investment property.

The Nominee Balance sheet of the TN Asset Management with a balance sheet value of USD27,9m is quite significant though there is need to increase the share capital of the Company to match the signicant risks associated with a growing nominee balance sheet.

Lafarge Cement Zimbabwe Limited
The Cement company has held its own in the recovery process of the country even though activity in the construction sector is still subdued. With profit at USD5,2million the company did well.

The cash resources however at USD620k are not so healthy reflecting the working capital challenges of many local companies. This is further reflected by the Borrowings of USD1,6m.

The exchage loss of USD0.4 million reflects the significant exchange rate risks affecting both liabilities and assets of companies.

Risk management will remain a priority for many boardrooms going forward.

TA Holdings Limited
The financial results of the group have shown the positive impact of a diversified group and surely Shingi Mutasa and his investment group are doing well. With a strong balance sheet of USD162m there is evidence that the group has grown over the years and value is being created especially in the markets outside Zimbabwe i.e. Botswana, South Africa and Nigeria.

Its interesting that the group has made an investment in PG Group and this shows its interest in the construction sector.

Unlike exchange translation losses incurred by ABC Group, TA Holdings had positive translation exchange gains of USD3.2million which augured well for the total comprehensive income for the group. This goes to show the impact of prudent exchange rate risk management.

Total Comprehensive Income after tax stood at USD710 532. The profitability of the group was impacted negatively by the loss of USD2m arising from Zimbabwean operations and associated companes namely Sable Chemicals and Cresta Zimbabwe. Cresta was affected by all time low occupancy rates standing at 40% and revenue per room (REVPAR) of USD37.3 which is quite low given that the breakeven hotel rates should be around USD50-USD70.

Cresta’s performance does not compare favourably to a sister associate company, Cresta Marakanelo with REVPAR of USD59 and occupancy rate of 67%. In the hotelling business it is all about volumes and one hopes Cresta in 2010 will do more to boost its Zim operations especially with the World Cup on the shores of SA already!

The cash resources of the group are quite healthy with the company sitting on USD11.8 million of cash resources of which USD11.7million (more than 90%) are outside Zimbabwe. This shows that the company is still cautious of the sovereign risk of the parent country Zimbabwe and would want to manage this risk going forward.

Stanbic Bank
Nothing beats a sound bank with a sound balance sheet! This is the case of Stanbic Bank, modelled around the basics of banking – mobilise deposits and deploy in the interbank market and loans to various sectors. There is little financial engineering and fancy financial instruments on the bank’s books and yet the company posts what seems to be the best profit so far of USD6.7m from the banking sector results.

Most depositors such as NGOs and embassies bank with Stanbic and this seems to be reflected in the strength of the balance sheet standing at USD201m. This translates to ROA of 3%.

The bank is adequately capitalised with Tier 1 Capital standing at USD18.5m way above the minimum prescribed capital of USD12.5m. The shareholders do not have to do much and of course the the bank benefits from centralised technical support from Standard Bank in areas such as credit and risk.

The synergies with the parent group are also reflected in loans amounting to USD2.5m which were forgiven by Standard Bank group, further boosting the group’s profits and lowering its gearing ratio.

This shows that the parent company sees value in maintaining its value in Zimbabwe. Unlike MBCA which did not post good results, Stanbic Bank has prooved that one does not need to do much to sell an established brand such as Stanbic.

Local banks should know that depositors are now looking at the soundness of the balance sheet, good service and risk management systems before depositing funds in any institution. The funds under custody of USD167m further reflect the confidence clients have in the soundness and reliability of the financial institution.

Renaissance Financial Holdings Limited
If one thinks, TA Holdings is a monster of a group, then pause for a moment and look at Renaissance Financial Holdings Limited. With a balance sheet of USD173m, slightly more than USD162m of TA Holdings, the group has done far much better in terms of profitability with USD9.2m total comprehensive income attributable to non-controlling interests and USD1.2m to equity holdings of the parent.

A closer analysis of the segment performance reveals that much of the profit was generated by the insurance arm of the group, Afre Corporation which posted USD31.6m total comprehensive income for the year.

Renaissance Capital in Uganda continues to post losses and one hopes this business segment was a worthwhile investment given that Uganda still has its civil unrests affecting parts of the country. The other business segments, RFHL, Stock broking and renaissance merchant bank posted losses at the bank of a challenging environment for a financial services sector not involved in mobisiling cheap deposits.

The merchant banking model is facing challenges in Zimbabwe given a financial market without much depth and lackingz financial engineering. This has seen merchant banks such as Interfin looking at penetrating the retail banking sector through the planned takeover of CFX bank.

Nicoz Diamond
The insurance company posted a humble USD1.8m for the year ended 31 December 2009. The balance sheet stood at USD17.7m reflecting the USD4m rights issue concluded in December 2009.

Given the small balance sheet, the ROA is obviously quite high standing at 10.2% which shows management is doing well to sweat its capital in the face of limited resources.

Turnal Holdings
The total comprehensive income of USD8.1m was largely driven by revaluation gains in property plan and equipment. This non- cash gains were reflected in the cash and cash equivalents balances of only USD996k.

The performance of this company will be closely linked to the performance of the construction and housing sectors. As the economic recovery continues, the group is likely to post better results. However the profitability of the company is commendable with ROA standing at 24.7%.

Fidelity Life Assurance of Zimbabwe
Fidelity Life stood its own in this reporting season posting total comprehensive income of USD2.3m with a balance sheet size of USD15.9m translating to ROA of USD14.5%.

The group’s performance was largely sparred by good performance of Fidelity Life Assurance of Zimbabwe contributing USD2.1m (91.3%) akin to the Afre Corporation performance although on a much smaller scale.

Zimbabwe Actuary Consultants only contributed USD5k to the group profits and in my view is a reflection of the skills gaps in qualified actuaries in the local market.
Dony Mazingaizo has an interest in Financial Management & Financial Reporting

Thursday, March 25, 2010

FBC Holdings End of Year 2009 Audited Financial Results

For a bank that i worked for, one would naturally want to see how it is performing. The bank is obviously driven by entrepreneurs who are looking at the slightest opportunity to create value for its shareholders.
The profit results were largely a reflection of 2 main things, low interest income as reflected by the high cost to income ratio of 80% and once off gain of USD4,8m on acquisition of turnall holdings limited which was a conversion of debt to equity. This gain had a favourable effect on the profit of the group.
The disposal of non core properties and equipment also created value for the group translating positively on the cashflows too. This reminds me of the Path to Growth (PTG) initiative that was followed by Unilever some time ago to create value through disposal of non-core operations. Such strategies are obviously needed for survival and unlocking shareholder value.
FBC Building society still reflects the challenges of the mortgage market with disposable incomes of households still limited to fund house development. However the proposed recapitalisation of the society should put it on a solid footing for the future.
One remains to see how the Turnall investment will be handled as it is definately non-core but this could herald a diversification stragegy on the part of the group.
The stragetic alliance of the group with NSSA was reflected in the board with the appointment of Mr Matiza to the group board. NSSA continues to be a significant shareholder in the group with significant stake in FBC Building Society.
There was no impairment of investment properties showing that there was no excessive valuations done in the 2008 periods and the marginal fair value gain of USD12K had a positive contribution to the total income of the group. Other companies have been posting impairment losses on properties.
Operational Risk remains a major concern for the bank as it is for many banks in the country which have been affected by roberries and thefts. However the bank seems to have put in place strategies to curb further losses by having staff rotations and Operational Risk Assessments.
The country is behind Basel II implementation targets as many other jurisdictions such as South Africa have already rolled out Basel II. With Basel III already being mooted on the back of revisions to Basel II, one can only hope that the implementation of th Capital Accord is fast-tracked so that the country keeps pace with the global financial and prudential developments.
FBC has however already implemented the piecemeal guidelines on Basel II outlined by Reserve Bank.
One sincerely hopes the stock market will reflect the performance of the bank as the shareprice has been heavily discounted over the years trailing the likes of NMB Bank which has a very small balance sheet compared to FBC Holdings!

Dony Mazingaizo has interest in Financial Management and Financial Reporting

Thursday, March 11, 2010

ABC Holdings Results for YTD 31 Dec 2009 showing strong growth

The results of ABC Group - a regional financial institution registered in Botswana have shown significant growth with the balancesheet growing by 11% which would be above the growth in GDP in many of the countries where the group has a footprint. However, the results show the effect of the global recession and credit crunch that affected its Zambian operations. I think this might necessitate a need to invest in fresh blood in the employees of that country!. However this also shows that credit risk and risk management in general will remain key issues for the banking industry going forward.
Group total comprehensive income was affected by revaluation losses on owner occupied property of USD5.4K . The investment property also had write downs of BWP14.6K . This reflects the stress in the property market prices in the region and Zimbabwe in particular.
Exchange rate risk is also reflected in the exchange losses on translating foreign operations with USD11.02K knocking the total comprehensive income thus weighing down on the total comprehensive income which reflects a total loss of USD5.7K.
The cashflow which is the lifeblood of any business showed positive changes over the 2 years with an increase of BWP338K registered over the period. The once off disposal of associate registered a profit contributing positively to the cashflows.
Segmental results show interesting growth in Mozambique and Botswana and these seem to be jurisdictions of promise in the SADC region despite the Diamond prices that remained depressed in 2009.
The Group Chairman, an astute entrepreneur and engineer, Mr. Chdawu resigned after 9 years serving the company and one hopes for continued growth in the Bank into a true pan-african entreprise

Dony Mazingaizo has an interest in IFRS and Financial Management

Monday, March 8, 2010

Black Economic Empowerment and the Future of Zimbabwe

I think in the minds of many, there is concensus on the need for black economic empowerment in Zimbabwe, also called BEE in South Africa. The real challenge seems to be on the operational modadilities.
In addition if one looks at the case study of South Africa, one realises that BEE is more than just share ownership, but looks at other broader equity issues such as preferrential procurement, and skills training. In addition the BEE environment in South Africa in cemented by codes which have gone through periods of ammendments largely due to evolutionary consultations done with other stakeholders.
There is more that can be done by the government of Zimbabwe to create an enabling investor climate during this recovery period while balancing off the need for economic participation by locals.
Dony Mazingaizo, has and interest in IFRS and Financial Management