UPDATED: Banking profits rise 18% as doubtful debts jump 73%

Barclays head office in Lusaka. Barclays headline earnings rose 16% to K145million from June 2017 levels pushing the institution to second place rallying behind Standard Chartered Bank which led the earnings race at K167million representing a 36% rise compared to H1: 2017 levels.
  • Indo Zambia earnings grow remarkable 93% to K81.1million
  • SBZ and Zanaco accounted for 58% of industry doubtful debts at K266.11million 
  • Industry interest expenses decline 34.5% to K945million from K1.38 billion in the same period a year ago attributed to lower cost of capital 

HALF YEAR commercial banking profitability (year on year) rose 18.2% to K731.2 million from K618.32 million (H1:2017). Of this, 73% (versus 87.6% in H1:2017) was contributed by (5) banks leaving the remaining 13 commercial banks to share 27% of the earnings cake. Zambia’s commercial banking space comprises 18 financial institutions. Standard Chartered (SCZ) posted earnings of K167.92 million representing a 36% increase from June 2017 position. Barclays (BBZ) tagged right behind with a 16% half year on year earnings of K145.4 million while Stanbic (SBZ) was third at K90.42 million, a 15% decline from its half year position a year ago. Indo Zambia was fourth at K81.10million, a 93% rise in earnings from K41.96million with Citibank (Citi) in fifth place at K78.6million, a 15% slowdown from K92.99million in June last year.

Doubtful debt stock jumps 73%

Credit impairments on the other hand sharply rose 73% to K454.28 million from K263.66 million reflecting an autopsy of a deteriorating credit environment driven by various factors ranging from sovereign exposures to weather factors impacting the agro sector. Other drivers of the jump include implementation of the International Financial Reporting Standards No.9 – IFRS9 prescribing for a stricter treatment of credit loss provisions. Of the K454.28 million credit impairment industry number, Lusaka Securities Exchange – LuSE listed Zambia National Commercial Bank Plc (ZANACO) contributed 37.4% (K170.19 million), while Stanbic’ s share was 21.11% (K95.92 million). The two banks accounted for 58.5% of the industry doubtful debt stock. (Doubtful debts or impairments are debts that there is doubt as to their collect-ability and as such must be provided for in accounting).

Trading income up 14.35%

Trading income rose 14.35% to K541.99 million from K473.96 million with key contributors being SBZ at K130.08 million (24% rise from H1:2017), SCZ K85.95 million (15.8% rise from H1:2017) and BBZ (13.37% rise from H1:2017). Traditionally SBZ has consistently been first in the trading income space.

NII rises 17%

Net interest income (NII) rose 17% to K2.59 billion from K2.21 billion with key contributors being ZANACO (K414 million), SBZ (K398 million), BBZ (K364.9 million) and SCZ (K349.6 million).

Interest expense narrows

Interest expense narrowed significantly by a 34.5% to K945 million from K1.38 billion in the same period a year ago. This was attributed to the end of the ‘expensive deposit era’ which was dubbed an effect of the 2015/2016 liquidity (Kariba) crunch. Most commercial banks have to date successfully flushed out effects of the liquidity crunch. The decline also reflects effects of the monetary policy relaxation in the period where the Bank of Zambia (BOZ) eased monetary policy by slashing the benchmark interest rate significantly in addition to lowering the statutory reserve ratio to levels where the cash market is flush liquidity forcing funding costs lower.

Contributors to the industry number of K945.1 million are ZANACO (K163.8 million), BBZ (K121 million), SBZ (K102 million) and Atlas Mara (K86 million).

Cost to Income ratio

Running the leanest and most cost effective model was Citi with a cost to income ratio of 29% (4% higher than H1: 2017 level), BBZ successfully lowered its costs 7% to 51% while SCZ posted a CTI of 52%, a 5% tighter environment from a year ago at 57%. SBZ 4% marginally lowered its previous half year CTI at 60% and Atlas Mara’s CTI position was infinitesimally changed at 82%. Atlas Mara’s position despite in 5th place a year after the merger, can be for surpassing 13 other commercial banks.

Balance sheet up 11.87%

Industry balance sheet growth rate was 11.87% to K73.98 billion from K66.22 billion. Key drivers of the balance sheet size were SBZ (15.3%), BBZ (13.94%) and ZNCB (12.83%). The skew is such that there three commercial banks account for 42% of the industry balance sheet size. Atlas Mara however grew its balance sheet 18% to K5.5 billion, while ZNCB grew 17% to K9.49 billion. BBZ was the third fastest in growth at 13% at K10.32 billion. (These growth rates were H1:2018 vs H1: 2017).

Other commercial banking concerns

Concerns around accumulation of domestic arrears continue to threaten the industry non-performing loan portfolio prudential limit of 10% which has been in breach at 12.7% for last two years. With a K1 billion increase in domestic arrears to K13.7 billion as at H1: 2018 as announced by the Minister of Finance in Zambia’s half year report, our analysts project that adverse effects of Zambia’s fiscal situation will be transmitted to the banking sector pushing NPLs higher. This coupled with the IFRS9 new accounting standard requirement will impact profitability of the industry. There is also need for the state to ensure stability in policies especially agriculture which have in the recent past impacted counterparties whose operations have become difficult. Expedition of arrears dismantling is critical to restoring the desired contribution commercial banks can make to macroeconomic growth.

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