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

Zambia National Commercial Bank - ZANACO.

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 botton 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 can not 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.

Business Times Analyst  

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

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