Charles Carey is a Managing Director who has every reason to be proud. Why? Well, the numbers 23, 24 and 12 resonate with him and his team as they ended their financial year (which oddly enough seems to be the lone wolf of LuSE as they are the only listed company who report the end of year in winter) with an admirable performance. Charles’ bank closes the year with net interest income up by 23%, 24% improvement in the performance of loans and advances and 12% increase in customer deposits.
When we first sat down with Charles (his secretary serves exception ground coffee) earlier this year, he had questioned our assertion that his numbers for customer deposits had actually not shrunk. It was in fact a cleanup his team had done on no performing accounts and its clear to Fi that the strategy they employed has now yielded the desired results of growing deposits.
A closer look at the number 23, reveals that Cavmont’s net profit on interest-earning assets, such as loans or investment securities performed really well in a macro environment that has seen stability for the banks from the harsh period when liquidity was tight. The bank acknowledges the Central bank’s move in the SENS announcement of 26 October as the driver of the reduction in cost of funding which allowed the bank to cease the year at 23.
Curiously, although non-interest income reduced by 4%, the bank indicates that they will purse diverse non-interest revenue streams to grow income. The choices for the bank include income derived primarily from fees that include deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fees. For clients of the bank, they will have to be alert on what innovative ways the bank will purse in order to grow this particular revenue stream.
The number 24 should be significant not only for the bank but stakeholders (Ministry of Finance and Bank of Zambia) who have been party to reigning in inflation and the Kwacha. To put it into perspective, with inflation averaging 11% and the dollar hovering around nine point something over the period under review, they were able to grow loans and advances on the back of a period when BoZ itself admitted at the last MPC that under performance of loans was one of the reasons MPC decided to go south for the winter on rates. Clear evidence of astute management on the part of Charles and his team no doubt.
However, the number that is not discussed in the in the SENS announcement is return on assets. This is the ratio frequently applied to banks because cash flow analysis is more difficult to accurately construct. The ratio is considered an important profitability ratio, indicating the per-kwacha profit a bank earns on its assets. In the case of Cavmont, our calculated ROA for 2017 was 0.03% compared to 0.07% in 2016. This was a marginal decrease in return on assets however, it is part of the reason why earnings came in lower in 2017 compared to 2016 end of year. Furthermore, we see their earnings per share (EPS) reducing from 0.006 to 0.004. Therefore, even if the ROA is a low figure, it actually represents a substantial amount of revenue and profit for the bank.
Going forward, the bank promises shareholders of its continued commitment “to further differentiate itself in the financial sector, with focus on our customer value proposition and product delivery. Furthermore, the Bank will continue with its proven growth strategy of attracting new customers, diversification of its funding base, maintaining a quality loan portfolio, prudent expense management and improving operational efficiencies to deliver sustainable value to all stakeholders”. Prudent expense management is clearly evident with the inflation parity operating expenses that only increased by 7% increase.