Zanaco’s FY2017 head­line earn­ings bounce back mod­estly; loan im­pair­ments widen sig­nif­i­cantly

Zambian Business Times - - FINANCIAL MARKETS - Busi­ness Times An­a­lyst

ZAM­BIA NA­TIONAL COM­MER­CIAL BANK – FY2017 earn­ings re­cov­ered to ZMW88.6mil­lion ($USD9.05mil­lion) from a mere break even in 2016. Key con­trib­u­tors of the re­cov­ery was a (22.4%) rally in in­ter­est in­come to ZMW1.06bil­lion backed by a (20.76%) rise in non-in­ter­est in­come to ZMW539.68mil­lion off­set by a widen­ing by (34.6%) in in­ter­est to ZMW306.43mil­lion and a (21.76%) in non-in­ter­est to ZMW959.15mil­lion ex­pense lines re­spec­tively.

In­vest­ment in gov­ern­ment se­cu­ri­ties pushes in­ter­est in­come higher

The banks in­ter­est in­come line rose (22.4%) to ZMW1.06bil­lion as gov­ern­ment se­cu­rity lines soared (121.16%) to ZMW405.32mil­lion mainly due to its in­vest­ments in trea­sury bills and bonds which earned in­ter­est in­come tak­ing ad­van­tage of the pric­ing around the term struc­ture of Kwacha in­ter­est rates. How­ever, in­come from loans and ad­vances slowed (5.26%) to ZMW635.22mil­lion as the bank slowed on credit ex­ten­sion.

Fees and Com­mis­sions drive non-in­ter­est in­come higher

Fees and com­mis­sion rose (26.68%) to ZMW496.99mil­lion which cou­pled with a (20%) de­cline in for­eign ex­change trad­ing rev­enue to ZMW42.63mil­lion pro­pelled the banks non – in­ter­est in­come line (20.76%) higher com­pared to 2016.

In­ter­est ex­pense up 34.68% as cost of de­posits swells

Zanaco re­flected a (47%) higher cost of de­posits which our an­a­lysts spec­u­late could be a tied to fund­ing cost is­sue due to the model used and partly due to ex­pen­sive de­posits booked in the 2016 fi­nan­cial year when Zam­bia un­der­went a liq­uid­ity crunch. Most banks have not fully re­cov­ered from the stressed con­di­tions.

Credit im­pair­ments widen 50% in Q4 im­pact­ing bot­tom line

A (134%) rise in credit pro­vi­sion num­ber to ZMW196.86mil­lion had the big­gest im­pact on the banks bot­tom line with (49.9%) of this num­ber at­trib­uted to Q4: 2016. Our an­a­lysts merely ob­serve an in­ter­est­ing pat­tern that cor­re­lates this jump in im­pair­ments ap­plied just af­ter the reg­u­la­tors su­per­vi­sory in­spec­tion by the Bank of Zam­bia. The reg­u­la­tor does have the man­date to pre­scribe pro­vi­sions and will also lat­i­tude to rec­om­mend changes in man­age­ment. These pro­vi­sions could also be merely the bank try­ing to take a pru­dent stance in re­sponse to loans they deem could go back as they clean up to start 2018 on a fresh page. Ei­ther way Q4:2017 sig­nif­i­cantly wiped some mas­sive gains of the bot­tom line.

Cost to In­come ra­tio swells as bank op­er­at­ing jaws ra­tio de­te­ri­o­rates

The bank’s non-in­ter­est ex­pense (21.76%) rise to ZMW959.15mil­lion com­pared to the in­come lines net of credit pro­vi­sions ac­cel­er­ated its cost to in­come ra­tio to (106.72%) from (73%) in 2016 – rep­re­sent­ing a (33.72%) widen­ing. This shows that the banks costs were ris­ing at a faster ve­loc­ity than that of its rev­enue gen­er­a­tion. The banks op­er­at­ing jaws ra­tion de­te­ri­o­rated. ( Jaws mea­sures the ve­loc­ity with which an en­tity’s costs move with its rev­enue con­tri­bu­tion). How­ever, the ad­justed cost to in­come ra­tio with a far much lower pro­vi­sion would be just un­der a 100%. (still higher than in 2016)

Bal­ance sheet growth still bullish

The bank demon­strated that it is big strong and re­li­able post­ing a (20.24%) bal­ance sheet growth to ZMW9.376bil­lion com­pared to 2016’s ZMW7.79bil­lion. The bank posted a re­turn on eq­uity – ROE of (5.846%) from merely break­ing even in 2016 af­ter its earn­ings were wiped out by ex­tra­or­di­nary items linked to a mas­sive cor­po­rate re­struc­ture.

Mar­ket com­men­tary

“Be­ing listed on the Lusaka Stock Ex­change – ZANACO’s FY2017 per­for­mance has sent a pos­i­tive state­ment to its stock­hold­ers com­pared to 2016. Zanaco’s in­come lines were more bullish in 2017 com­pared to the pre­vi­ous year ev­i­denced by its healthy in­ter­est in­come and non – in­ter­est in­come lines. Like most com­mer­cial banks, the in­sti­tu­tion ben­e­fited from in­vest­ment in gov­ern­ment bill and bonds lever­ag­ing off the shape of the Kwacha yield curve. Fees and com­mis­sions rose sig­nif­i­cantly de­spite a lean for­eign ex­change trad­ing line which clearly isn’t the banks strong­hold. Our an­a­lysts de­tect an in­ter­est­ing pat­tern which shows a widen­ing in credit im­pair­ment lines by ZMW98mil­lion just af­ter a reg­u­la­tory re­view by the Bank of Zam­bia. We can­not rule out a pos­si­bil­ity that that this spike in pro­vi­sion could have been pre­scribed by the reg­u­la­tor who re­serve the right to do so; how­ever, this is a prob­a­bilis­tic as­sump­tion. Other rea­sons for the sharp rise could be that, the bank took a more pru­dent credit risk man­age­ment ap­proach of rec­og­niz­ing bad loans up­front in 2017 so as to start 2018 of a clean foot­ing hence the sharp rise. With a de­te­ri­o­rated jaws ra­tio Zanaco could be look­ing at cost con­tain­ment ini­tia­tives as its cost to in­come ra­tio widened to 106% from 73% pre­vi­ous year. Even af­ter ad­just­ing for the sharp im­pair­ment rise the bank would have still had a CTI ra­tio of 97%. The bank’s bal­ance sheet grew bullishly by a (20.24%) quan­tum com­pared to the 2016 fi­nan­cial year as it posted a mod­est re­turn on eq­uity – ROE in­clu­sive of sub­or­di­nated debt – of (5.846%). With the clean-up in the bank’s credit port­fo­lio the mar­ket will ex­pect a stronger per­for­mance in 2018. Zanaco also made gi­gan­tic strides to re­gain its lost glory as the best dig­i­tal bank through launch­ing of apps that painted the coun­try red with posters read­ing – bank here- in ad­di­tion to many other strate­gic ini­tia­tives. It is the only bank with a de­fined ‘C’ to its ex­ec­u­tive suite as it added a Chief Dig­i­tal Bank­ing Of­fi­cer – CDBO role de­signed to drive and steer the bank in a di­rec­tion that will see it re­gain its mar­ket dig­i­tal bank­ing flare af­ter-all the gen­e­sis of dig­i­tal bank­ing was cham­pi­oned by Zanaco a decade and half ago. One ad­van­tage Zanaco has in the dig­i­tal space is that they can write their own pro­grams hence are able to tai­lor make dig­i­tal so­lu­tions to suit the lo­cal needs – a char­ac­ter­is­tic a hand­ful of banks have.

As at 15.30pm ZANACO shares traded for ZMW0.96 on the LuSE.

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