I’d like to take you on a journey, dissecting Investrust Zambia PLC’s financials over the past 5 years. Hopefully through it, a trend will be observed as well as an ongoing strategic master class which is aimed at bringing the troubled bank back to profitability. The fascinating links between the case of Investrust and Deutsche Bank, the largest lender in Germany make for interesting viewing and highlights the similar conditions impacting banks globally.
Breakdown of performance 2015-2018
2015 was a year of change at Investrust as the position of Managing Director changed hands on three occasions. Mr. Friday Ndhlovu had retired and was replaced by Dr Chembe who cut his stay short due to illness and was subsequently replaced by Mr Isaiah Chindumba. According to their annual reports, 2015 saw a Loss after tax of K52.33 million reported, owing to Macro environment headwinds impacting the bank’s performance with the operating environment headlined by high lending rates, tight liquidity and increasing non-performing loans all contributing to the dismal profit release.
Rising funding costs- which relate to costs banks incur when they raise money to issue loans, while Increased money market borrowing costs spurned by the rise in money market interest rates further waned in on profit. Net interest income fell by 19% from 2014 while interest expenses rose by 13% which contributed further to the woes. Reassurances given by the board, of legal action on those defaulting on loans was given which served to calm investor uncertainty. Income was down 4%, with EBITDA and operating profits falling by 20 and 37% respectively from the year prior. The bank had historically struggled with profitability with 2015 being the 3rd year the bank reported zero earnings, much to the disdain of shareholders, emphasized through a 64% reduction in its equity holding amongst investors.This led the bank to adopt a complete restructuring program that was aimed at turning around its fortunes under a restructuring and consolidation strategy, which includes major cost cutting, increased diversification of its deposit portfolio and increasing its non-interest income through increased treasury activity and deposit mobilization(higher number of deposited savings) as it seeked other avenues for revenue growth.
The beginning of 2016 provided us with a story involving ZCCM-IH who looked to increase their shareholding In Investrust. This provided an opportunity for Investrust to increase its liquidity by generating capital through ZCCM-IH purchasing all its shares that weren’t subscribed for by other shareholders. This subsequently led to ZCCM increasing its shareholding from 10-45% , which according to the law guiding the Securities Act(or Statutory Instrument No 170 of 1993 for the legal minds amongst us) required ZCCM to make a mandatory offer for the shares of all the minority shareholders of Investrust which constituted a takeover bid. Wow! Would ZCCM-IH go ahead and takeover Investrust? No! ZCCM opted for a waiver until 21st October 2017 to reduce its holding to under 35% by selling some of their shares off to ensure they didn’t have to go through with the offer. However, their standpoint changed in May 2017, when they opted to place an offer for the minority shareholders of the bank (more on this later).
Performance wise, 2016 saw the bank reap a loss after tax of K47.3 million in profit at year- end which saw improvement from the previous year but still within loss territory. Net interest income rose by 8% owing to an increase in interest rates to 40% for Kwacha denominated loans as well as BoZ raising its policy rate by 3%. However, the bank had intensively borrowed off money markets from the Bank of Zambia which saw a significant rise in funding costs. Fee expenses had been significantly higher as a 358% increase in expenses of K14.6 million had been reported due to the major charges associated with borrowing from Bank of Zambia. Rising interest rates further increased impairment charges as likelihood of defaulting loans increased.
The bank’s directive to diversify its offering by moving towards the use of Fin-tech begun to seep through as it introduced a brand-new Pre Paid Visa Debit card to its product offering which was meant to spur on deposit mobilisation (which is the number of people depositing savings within the bank) and was in line with the banks restructuring program which was highly commended by deputy Bank of Zambia Governor Bwalya Ngandu. The end of 2016 saw the bank instate new Managing Director, Simangolwa Shakalima in November 2016 at a time when the bank was weathering difficult times. Global growth fell 3%, while bad climate impacted Agro business (one of the bank’s target sectors) as it continued seeking ways of generating capital. This culminated in the bank shedding off one of its subsidiaries, Zambia Home Loans (ZHL), disposing 51% to their shareholders as it didn’t see it being a part of the bank in the long term.
2017 saw the bank impacted by BoZ’s decision to cut rates in both the 1st and 2nd quarter of 2017 which negatively impacted earnings for the year. The bank still maintained a majority of shareholders who continued to place faith in the banks leadership, despite no dividends being paid for the last 3 years and recorded losses since 2013 which continued to plunge the bank as they reported a loss after tax of K37.99 million. They had seen a subsequent reduction n the amount of loss regardless which signalled the bank stepping in the right direction. Net income was up 20% to K48.92 million, with a decrease in interest expenses by 24% driven by the spill over of Bank of Zambia’s three consecutive rate slashes. This contributed to improved Kwacha liquidity which had previously been tight (which was negatively impacting investrust previously) and enabled the bank to liquidate some of its expensive obligations carried forward, including the K14.6million owed to BOZ. More aggressive strategy as promised by management, through legal action led to K105 million in non-performing loans recovered. The bank began to see light at the end of the tunnel as its turnaround strategy continues to drive its recovery as cost reduction, deposit mobilization, greater capital generation through asset disposals and share issuances remain a priority for the Zambian lender.
The losses carried on however, through to 2018 which saw the bank’s continued struggle for profitability as it reported a loss after tax of a K109.18 million as previously deferred tax had been carried forward, amounting to K53 million. Reduction in net interest income by 19% to K39.5 million contributed to the negative profit numbers as slow growth in its loan book eroded profits. This was mitigated by lower interest expenses which fell by 51% and was a testament to the banks drive to cut costs as it streamlined its operations by closing two branches in the country through its cost containment strategy. As the bank vowed to focus some of its attention on generating non- interest income, 2018 had dampened the mood round that as Bank of Zambia’s directive to cut out unwarranted bank charges proved to be a blow for the bank which saw a 7% decline in commission income from K46 million in 2017 to K43 million.
ZCCM’s involvement
Getting back to ZCCM-IH, who placed an offer for the shares of Investrust’s minority shareholders came to an agreement in May 2019 with Investrust. This saw a Claw-back Preference Share program(which involves the pay back for an asset or an amount received by an entity under certain conditions) worth K286 million drawn up that enabled ZCCM-IH access to a larger Equity holding in the company which took its holding from 45.4% to 71.4%. The amount of money generated through this issuing of equity to ZCCM-IH is likely to serve as another huge step in recapitalizing Investrust plc and further driving the company back to profitability. It’s at this point that we currently find Investrust as it contains to work towards reaching profitability and realising value for its shareholders through its continued strategy aimed at cutting costs, recapitalizing, increasing its liquidity and improving its non-interest income activities, while diversifying its product range to more technologically advanced offerings.
The Deutsche Bank/Investrust comparison
Now looking at the journey Investrust has been through, I couldn’t help but think about Deutsche Bank. The largest bank in Germany that’s been treading on troublesome waters as well. Like Investrust, Deutsche is at a point of major restructuring as shareholders have been left to ponder the future of the German lender. CEO, Christian Sewing has been at the forefront of trying to restructure the bank through cost cutting that has included major layoffs across its global branches as well as a complete streamlining of its trading division which saw over 18,000 jobs lost particularly in London. Negative sentiment round the company has seen its share price slump over the last couple of weeks slumping over 5% at close on Monday this week. Although, the fallout at Investrust has not been as catastrophic in terms of layoffs and effect on its share value, a similar narrative is observed between the two institutions.
Deutsche over the past couple of years has been marred with struggles to sustain profitability due to ballooning costs, higher levels of recorded impairments on its balance sheet and general inefficiencies in the running of particular divisions with 2015 results showing a loss of €6.8 billion. This particular narrative carried on in 2016 as they recorded losses of €1.3 billion and this was followed by more losses recorded in 2017 of about €735 million. Falls in the company’s net interest income and higher funding costs all attributed to its results which were some of the issues constantly cited in Investrust’s profit misses. The nature of the banking industry in Zambia, with 19 commercial banks all looking to attract clients with their unique offerings means competition plays a major part in determining who hits profit and who doesn’t. In a similar vein, Deutsche has struggled to keep up with the competition both in Europe and the US which has contributed to some of its losses over the past 5 years.
In a similar scenario to that of Investrust and ZCCM-IH, Deutsche attempted to generate capital through a merger with another lender, Commerzbank in April this year. However, this fell through due to the risks associated with the costs of such a deal. Whereas Investrust came to an understanding with ZCCM, collaboration with another as a means of improving liquidity and recapitalizing didn’t reap the same benefits for Deutsche. Like Investrust, similar issues are driving the bank’s lack of profitability and it’s safe to say, judging by the strategies adopted between the two, tackling this will require major cost cuts and efficient use of capital as mentioned prior. For now, we can watch and see how each bank responds to growing scrutiny and turmoil in hope that there will see some light at the end of the tunnel.
