The prudential results of most Zambian banks are out and they make for interesting reading and analysis simply because “things are different” this time around. The Covid-19, a flu-like disease that started in China has spread around the globe and has had devastating economic impact in its wake. Markets around the world have fallen to record lows with equities in the United States shedding 20% in the first quarter of 2020, the worst in over three decades.
Commodities have taken the hitting too and the price of oil turned negative for the first time in history on 21st April 2020. In all this, the Zambian economy has not been spared with the Covid-19 compounding the vulnerabilities the economy was having, with the Kwacha falling 35% since the start of the year and inflation hovering in undesirable territory at 15.7% year-on-year for April 2020.
In an era like this, there is no adage with more echo than the one which states “cash is king”. Businesses of all manner and sizes have woken up to a whole new world in which cash taps in terms of revenue are now dripping instead of flowing. In such instances, liquidity takes on more importance than primary capital, and firms that don’t make the hard decisions might just be pushing for their day in court; not for justice but to file for bankruptcy. For some, even those hard decisions will not be enough.
It is in this regard that banks will be pivotal to smooth this rough ride ahead. After all, what will a bank do to assets whose values are approaching zero as minutes tick by? Nothing but book it as an impairment. It’s therefore important that banks are profitable and have healthy capital levels for the macroeconomy to have any chance of surviving the coming storm. Let’s, therefore, dissect into the numbers and see how Zambian major banks performed in the first quarter of what has been a tumultuous year thus far.
Stanbic keeps “stunning” the market
Stanbic Zambia Limited keeps stunning market players with stellar results even in the face of a brewing crisis. Net income for the quarter was K157.8 million, an increase of 24% from the fourth quarter of 2019. The bank also took some calculated risks and expanded their credit book by 26% to K6.7 billion in the process expanding further their asset size to K17.6 billion, the largest in the 18 member industry. However, not even the current stars on the block could escape some of the fiscal and liquidity challenges facing the entire macroeconomy as their interest expense was up 64% year-on-year.
One thing is for sure though, Leina Gabaraane, our man at Stanbic who has had a meteoric rise in the Standard Banking group since joining in 2002 has brought a competitive spirit to the Zambian banking scene like never seen before. All things equal, there was consensus in the market place at the start of the year that a K600 million after-tax profit was on the horizon for the first time in Zambia; but Covid-19 happened and in all truth, it turned most projections made at the start of the year upside down. However, if there is a bank you can bet on to break the odds; it’s Stanbic.
Zanaco is still Big, Strong, Reliable and Profitable
After-tax income for the red bank was K52.8 million, a 4.8% dip from quarter four 2019 after total revenues grew a dismal 5.7% from the fourth quarter of 2019. One impressive figure was the increase in trading gains by 58.6% from the fourth quarter of 2019 and is a statement to how the bank’s repositioning is coming on thus far. While the major blue banks have thrived in this area, this has been one of Zanaco’s Achilles-heel and the market will be totally shaken if Zanaco becomes masters at trading.
The banks’ funding efficiency was unchanged at 36%, one of the most efficient in the marketplace, thanks in part to a huge retail outlay which is a source of cheap deposits. This can also be corroborated by the fact that interest expense grew by only 11.4% quarter on quarter, an efficient number in a battered ‘tight liquidity’ marketplace. The provisions were up 18% year-on-year in light of the challenging fiscal environment compounded by the new era of Covid-19 economics.
The cost to income ratio continues to be a snag in Zanaco’s numbers as it stood at 83% for the quarter, up two percentage points from 81% in the fourth quarter of 2019 and is a source of sleepless nights for executives who have triggered a full-scale organisational restructuring to rein in cost and boost productivity. All in all, the famous red bank on the street is capable of competing at a high level and is onto something great. The price per share remains unchanged at K0.5 after it lost 35% for the FY2019.
ABSA is just getting warmed up!
Absa’s first results on Zambian soil have not all been fireworks and while some analysts might even view them as disappointing, it is the author’s view that they are just getting warmed up. After-tax income of K44.9 million was 39% lower year-on-year mostly weighed by credit impairments which hit an absolute figure of K51.6 million.
The rebranding exercise into “Africanacity” look from the sky blue of Barclays also took a toll on the expense line with non-interest expenses increasing 20.5%. Total revenue, on the other hand, had a marginal increase of 8% year-on-year. The Mizinga Melu team has also been the most aggressive in booking loans since 2019 and they have continued on the same path with their credit book increasing 19% from fourth quarter 2019 to K6.9 billion, the largest in the marketplace.
While this was lauded as a stroke of genius last year at the time, the proverbial planting of seeds – it has taken on another different perspective in the economics of the Covid-19 era which should not be ignored; instead of being ready for harvest, these loans might fail one after the other like a house of cards as fiscal challenges compounded by Covid-19 persist in the economy. Mizinga Melu, the veteran banker will be watching this one very carefully.
The Future is Female at Ultra-efficient CITI
The CITI board took the shrewd move to appoint Lowani Chibesakunda to the top job in April to replace Ferdinand Zauma and whispers in the marketplace suggest the decision was a stroke of genius as Lowani is a natural rainmaker with the ‘Midas touch’. CITI’s after-tax income was at an impressive K42.4 million, a 21% increase year-on-year. The secret to CITI’s success was its highly efficient funding efficiency and cost to income ratio which stood at 13.5% and 32% respectively taking the honour of the second most efficient machine in the marketplace with Bank of China leading on both parameters.
Still ‘Here for Good’ despite downturn in fortunes!
Standard Chartered, the ‘here for good’ outfit recorded an abnormal first-quarter loss of K185.8 million, a first in over two decades and after dropping out of the coveted big five last year. This was mostly driven by an impairment line that swelled 7.4% from the fourth quarter of 2019 to an astronomical K86.9 million. Further denting the bank’s numbers were the huge remodeling and restructuring costs that increased the non-interest expense line by 120% year-on-year. Total income growth declined 33% to K181.8. All these factors would feed into the bank’s unusual cost to income ratio of 197%, an outlier number which is a first in over two decades for an efficient bank that normally hovers in the region of 50-55%.
On another sad note, the loss position is taking place at a time when the bank will be moving to their new plush headquarters sometime in the fourth quarter if works are on schedule. They have no choice but to turn the tables around and move in those offices with some positive momentum. The price per share for the public listed bank is unchanged for the year at K1.51 after it shed 38% for FY2019.
Author’s note
The current big 5 for the first quarter consists of Stanbic, Bank of China, Zanaco, ABSA, and CITI. The big omission is the ‘here for good’ outfit who might miss out again, two consecutive years running. All the banks analysed herein were well-capitalized with all of them having surplus capital well above regulatory capital.
It is evident from the data that the effects of Covid-19 while currently active on the ground have not yet become pronounced with Zambia recording the first case in mid-March 2020 when the books for the first quarter were almost closing.
The challenges that therefore took hold in this first quarter are the same legacy ones from 2019 of deteriorating fiscal space, free fall of the kwacha, the abolishment of unwarranted charges, tight monetary policy stance squeezing liquidity in the market place and a dismal GDP growth rate which is trickling down to reduced disposable income at the household level. This, in turn, is forming a vicious cycle that is negatively feeding on itself. The second and third-quarter results will be a make and break moment as the massive tectonic shift effects of the Covid-19 will be visible on the bank’s books. Even if this pandemic hypothetically ends by month-end of May 2020, its effects which are lagged in nature will continue to linger on till the end of the year, even longer!
According to the Economist, Covid-19 will hurt emerging economies in at least three ways; locking down their populations, damaging their export earnings, and deterring foreign capital as it looks for safe havens like US treasuries. The same publication ranked Zambia 64 out of 66 countries on measures of financial strength. The message to bank executives is clear, buckle up for a rough and bumpy ride ahead and most important have the courage to act for the good of the economy in which you operate.
Katandula Chitika is an Economist, Writer and Structured Finance Analyst. The views expressed in this article are solely mine and do not represent the views of my employer, church and any other organization I am affiliated to. Contact me on katandula.chitika@gmail.com