BY Yetneberk Tadele, Addis Fortune
Alike United and Nib banks, it opts to capitalise than cheering shareholders with higher return
Wegagen Bank, one of the major players in the private banking industry, has seen its board of directors choose to boost the bank’s capital rather than cheering shareholders with higher return on their investments for the year.
Wegagen has joined the ranks of United and Nib banks in following such an approach, contrary to the directions others such as Dashen andAbyssiniawere observed to take.
“The global economic landscape hasn’t been stabilised,” Araya G. Egzyabher, president of the Bank, told shareholders at an annual meeting held on November 22, 2012, at the Hilton Hotel. “We need to build on our capital.”
The Bank is well capitalised if measured by its Capital Adequacy Ratio (CAR). Its paid-up capital has expanded by 22.3pc, reaching at 952.94 million Br, from 30 million Br when it was first established in June 1997.
Such feet have achieved the Bank a 38.9pc capital adequacy ratio, which is the highest among its peers. Its position as the most capitalised private bank puts Wegagen alongside Dashen and Awash.
But it has not come without a price.
Wegagen is among the banks that have rewarded shareholders with lower Earnings per Share (EPS) than previous years. Indeed, shareholders have noticed it, and voiced their concerns. The EPS of the Bank has hugely dropped to 378 Br from 448Br.
“It’s really frustrating,” a shareholder of the Bank, who owns 200 shares, told Fortune.
Unlike its peers in the private banking sector, Wegagen Bank has registered less growth in profit for the operation year 2011/12. Its declared profit after tax of 335.6 million Br grew by 3.8pc, against an industry average of 29pc and its own record of 24pc for the previous year. The highest growth in profit of 69pc for the same period was reported by Lion Bank.
Nonetheless, the marginal growth in profit largely came as a result of reversal of provision for doubtful loans amounting to 45.5 million Br, representing 13.6pc of profit after tax.
“We had formed a committee at the head office and dispatched its members to branches every month to discuss the performances of doubtful loans and implemented different strategies to reduce it,” said Araya.
Without the effect of this, the net profit of the Bank would have gone down by 10.2pc to 290.2 million Br, according to Abdulmena Mohammed Hamza, accounts manager at the London-based Portobello Group.
However, in a year where revenues from foreign exchange dealings have dwindled by an industry average of 25pc, the size of the decrease at Wegagen Bank was only 4.3pc. The size of its foreign exchange mobilisation has even increased by a staggering 60.6pc, compared to its own performance for the year 2009/10. Such performance has not been observed in any of the private banks.
“The management of the bank should be applauded for achieving such an incredible performance in a difficult year,” Abdulmena said.
Wegagen is the fourth largest bank in the industry in terms of asset size, with a balance sheet that is modestly expanding. The total asset of the Bank has increased by 3.6pc to 8.3 billion Br, a growth three times lower than the industry average. It has also disbursed loans and advances amounting to 3.478 billion Br during 2011/12, improving its loan to deposits ratio to 60.4pc, from 46.6pc the previous year.
But the increase in loans disbursement was achieved through utilising the liquid resources held at the end of June 2011, rather than mobilising fresh deposits, according to Abdulmena.
Its deposits have declined by 3.4pc to 5.76 billion Br, while the average deposit mobilisation for the 11 private banks has increased by 17pc.
So does its total income for the period shrunk by 1.3pc to 804.7 million, a rather growth area for the industry that has seen an average growth of 24.4pc. The Bank seems to have had difficult year in areas of non-interest related activities, particularly service charges and commissions.
Income from non-interest activities have plunged by as large an amount as 50.6pc, to 122.8 million Br, while income from foreign exchange dealings has gone down by 4.3pc to 233 millionBr.
“This is due to turmoil in the global economic situation and international money transfer agencies, such as Dhabshil, that started to work with other banks,” Araya told Fortune.
Indeed, a decline in foreign exchange operations has affected the entire private banking sector during the fiscal year 2011/12. An average decline of 23.5pc was recorded for the entire industry during this period, a loss industry experts attribute to global economic crises, particularly in theUnited StatesandEurope.
Other incomes have, however, decreased by 9.3pc, to 7.2 millionBr.
The size of service charges and commissions, comprising more than 30pc of the Bank’s total income in 2010/11, have further declined by nearly 12pc, when compared to 1009/10.
“This ought to be rather disappointing to Wegagen’s shareholders, seeing the Bank’s position has been eroded in a growth area of its business,” Abdulmena said.
The combination of deterioration in income led Wegagen to have a difficult year in improving its liquidity position. Its total cash and bank balances have dropped by 37.2pc to 2.6 billion Br.
Liquid assets to total deposit ratio has decreased to 45.1pc from 69.5pc and assets to total liabilities ratio has gone down to 37pc from 59.4pc, showing that the Bank has advanced more loans.
Wegagen’s liquidity has been further eroded due to its investment in the National Bank of Ethiopia’s (NBE) five-year bond, amounting close to 1.6 billion Br, claiming 19.4pc of its total assets or 27.7pc of the Bank’s total deposits.
“But this does not mean that the Bank is anywhere close to where we should be alarmed,” said a director of the Board.
It is a view echoed by Abdulmena, the experts in analysing corporate accounts.
“Though it is affecting our liquidity, we do not regret for contributing our share to the national development,” Araya said.
Perhaps in its bid to boost its deposit mobilisation effort, Wegagen has plans to increase its branch network by adding 10, to its currently operating 64, according to Araya.