By Keffyalew Gebremedhin – The Ethiopia Observatory (TEO)
What a Year for Ethiopian private commercial Banks, as well as the public-owned Commercial Bank of Ethiopia (CBE)!
We join Addis Fortune as it toasts Ethiopian banks in an article titled: WHAT A YEAR FOR BANKS.
Is this growth and the profits in bank wealth really part of the TPLF’s much-vaunted double-digit growth story or money in Ethiopia has started ‘reproducing’ itself? I challenge those with access to the data and the TPLF politics to put their skills into an honest analysis and inform the Ethiopian people as appropriate in the country’s long-term interests!
I have tried many times to look into our nation’s inflation figures, as produced by the Ethiopian Central Statistical Agency (CSA), of which we have the December 2015 numbers. The problem is what good would they do, when we all know that the figures have been terribly massaged and their steroids totally neutered.
If the national data, which in other countries the leaders, experts and the man in the street share is also a basis for policy-making. In Ethiopia, I guess, our leaders are also using, if at all, the CSA data and that may be the reason why we are constantly derailed as a nation – policymakers using falsified data!
At present, Ethiopia has about 15 million people in desperate need of food and water, according to the United Nations. Yes, this time the World Bank has fully assumed the task of writing Ethiopia’s check anytime the TPLF signals its need to import wheat. Yes we see that literally on a quarterly basis tenders being issued for wheat imports. The rich countries are happy, the World Bank is paying for their surplus wheats. It is good business.
Again yes, agricultural production for the past year in two seasons – belg and meher – has been turned into durst, terribly breaking the hearts of Ethiopian farmers because like our soils the rains have also dried out on Ethiopian skies. Even under normal circumstances, Ethiopia since May 2014 has been reported by the Man in the Ethiopian Prime Minister’s Office as food secure. It took him about 18 months to distance from his own announcement and state that was a misunderstanding. I was relieved he did not say terrorists or domestic opposition inserted in his statement.
And yet, still the TPLF regime is telling us that the headline or general inflation in December 2015 stood at 10.0 percent and food inflation was 12.1 percent. In November, general inflation was 10 percent, while food inflation was 11.5 percent.
While the CSA explanation of their numbers, as usual makes little sense from both the economics angle and the reality as well, this time around the Agency has ventured to state, without adequate explanation, “There was a slight decline in prices of some cereals, Pulses, vegetables and Spices (specially Pepper whole) during the month under review”. I do not know if they meant to tell us that the starving people of Ethiopia, 15 million of them have changed their food taste and the market for those agricultural production has been obeying the laws of demand and supply, and thus it prices have gone down!
How could this be? Where did the regime get those foods from in the first place? They are not produced in sufficient quantities at home now to meet the needs of the market because of the drought; nor are they all imported, or subsidized by the state. We have known for a long time Ethiopia has been importing foods for cities and towns, especially Addis Abeba to dampen the ferociousness of inflation. Doing that, we also knew the regime constantly battled with its corrupt officials and political cadres that buy most of it and put it into the market through the backdoor.
What then is the meaning of the CSA claim about the prices of these foods going down?
Both before the holidays and after, still prices of foods and goods have skyrocketed to most Ethiopians. Is it the case then that people have become poorer and have abandoned the market?
I do not know the answer to these questions, but I am worried and concerned about the country’s future and its direction, especially after Ethiopian banks have educated me how easier for a few individuals and groups to get richer in Ethiopia, while pushing the vast majority into the burgeoning excluded quarter!
Let us turn now to Addis Fortune’s What a year for the banks!
Banks, being a key component of the financial sector, have continued in 2104/2015, to show a remarkable growth in total assets, loans and bonds, deposits, capital and profit. This has led them to build their balance sheets and greatly support the state-led developmental model of the country, where the economy has enjoyed a blistering double-digit real gross domestic product (GDP) growth for the last eleven consecutive years.
The two state-owned banks – Commercial Bank of Ethiopia (CBE) and Construction & Business Bank (CBB) – and the sixteen private commercial banks’ assets at end of June 2015, have grown to nearly 474.2 billion Br, from 366.1 Br billion last year, accounting for 37.9pc of GDP (assuming the GDP figure for 2014/15 at current market prices will exceed 1.25 trillion Br). This tells that banks are increasingly buying government securities (NBE Bills) and extending increased credit and loans to businesses, companies, individuals, real estate, and government. It also means banks are extending loans to each other (inter-bank lending), and have significant cash and other real assets which have enabled them to grow their assets in absolute terms.
The bulk of the source of banks’ funds comes from savings or current (chequing) deposits and time deposits. Total deposits of all commercial banks depicting large increases, has shot up to about 366 billion Br, from 281.6 billion Br in the last fiscal year, accounting for 29pc of GDP. And of the total deposits, 211 billion Br (57.8pc) is savings and time deposits which signifies that more and more individuals, businesses, companies and financial institutions are placing their cash in the banks or making basic investments like term deposits, which the banks, in turn, use to make loans and advances, buy treasury bills and purchase the mandatory government securities whenever loans are made.
Also, the banks have increasingly extended their outreach to tens of millions of people by opening up more and more branches every year throughout the country, and have significantly improved their banking services by introducing new products and services through the application of modern technology.
As a result, their branch networks have reached 2,606 at end of June 2015, which increased by 430 from last year. Of this, 1,523 (58.4pc) were private banks owned and the rest, 1,083 (41.6pc), were branches of the abovementioned two state-owned public banks, of which 965 (37pc) of all bank branches belong to CBE.
However, although the private banks, in their continued efforts to increase their customer base and mobilise significant deposits, are expanding their branch networks in the country, CBE, the biggest bank in the commercial banking industry of the country, is expanding its branch network at a faster rate. In the past year, it opened 109 new branches, accounting for 25pc of the newly opened branches. Though this is one business area where all the private banks excel, they need to work hard to open more and more branches in order to expand further their banking businesses and operations.
CBE alone represented 65pc of total assets; nearly 70pc of total loans, advances and bonds; 66pc of total deposits; and 36pc of total capital of the commercial banking industry in the country over the past fiscal year. There is there for, a greater need for the private banks to build up their balance sheet items and raise their share of the growing banking business in the economy.
The banks, more specifically, the private banks, becoming profitable every year, have made good returns to their shareholders or investors. This has helped them to raise more funds from the public and increase their capital buffers, and remain solvent. As a result, the two state-owned commercial banks and the sixteen private commercial banks total capital at end June 2015 were reported to have reached 35.7 billion Br, from 28.1 billion Br last year. Their paid-up capital has also shown an increase, inching to about 22 billion Br, up by 2.5 billion Br from the previous year.
But as the banks need to build their capital in good times and show capital above the minimum capital requirement of 500 million Br to grow big and remain competitive in the industry, those late entrants that have not yet met the required capital level or are barely above the minimum need to plough back their dividend payout and increase their capital. They ought also to raise more funds from the equity market in offering more shares to existing and new shareholders, and increase their capital buffers.
Continuing their history of profitability, all the commercial banks, save CBB, have posted higher profits for the year. Their pre-tax gross operating income has surpassed 18.2 billion Br, up by 3.7 billion Br (25.5pc) from last year. Of this, 12.7 billion Br (70pc) was posted by the CBE, which tells that the market share of all the sixteen private banks in the banking industry is close to one-third. Hence, it can be said that the year has generally been good or an up year for most banks, except the CBB that has seen a significant fall in profit declining by 64pc to 46 million Br.
Banks, like any business entities can experience a decrease in income and subsequently a decline in net operating income and firm value. As there is no guarantee that the banks will have a bonanza every year, the other banks need to learn a lesson from CBB and take the necessary measures to ensure their pre-tax operating income keeps rising.
More specifically, banks must understand the many causes of earnings variability in their operating policies. Inefficiency in controlling direct costs and employee processing error; losses due to employee and customer theft and fraud; business interruptions from damage to assets, facilities, systems; transaction processing from failed, late or incorrect settlements; breaches in internal controls that result in fraud, theft, or unauthorised activities; technology risks; and client liability resulting in restitution payments or reputation losses, can cause operational risks in a bank. These result in expenses that are significantly higher than expected, producing a decline in income.
Therefore, since banks’ profitability will generally vary directly with the riskiness of their portfolios and operations, they need always to carefully identify, assess, monitor and control risks associated with credit, liquidity, market, operations, reputation and legality. Each of these risks is fundamental to the likelihood that existing events will negatively affect the bank’s profitability and the market value of its assets, liabilities, capital and shareholders’ equity.
On the other hand, besides the important role banks play in driving the economic activity of the country, they are essentially a collection point or place of investment capital in search of a good return. For a bank, buildings, people, processes, facilities, technology and services are means of drawing in more money and allocating it in the economy in a way the management and board believe will offer the best return for the loaned money. And by allocating money efficiently in the economy where the borrowed money will be best utilised and paid back fully in time, banks will be more profitable and their share value will increase.
Against this backdrop, when we see the profitability level of all the commercial banks, we find that the three small banks namely, Abay Bank, Lion International Bank and Enat Bank have enjoyed over 100pc gross profit growth during the fiscal year 2014/15.
Abay Bank, which commenced business on November 4, 2010, is reported to have posted an appreciable pre-tax gross profit of 167 million Br, up by 92.5 million Br (124.1pc) from last year. Lion International Bank, that joined the banking business some nine years ago on October 2, 2006, has also made a remarkable pre-tax gross profit of 276 million Br, showing an increase of 152.2 million Br (122.9pc) from the previous year. Enat Bank, that began business late on March 5, 2013, has, too, seen its pre-tax gross profit of the year doubled to 71 million Br in two years operation, from 33.8 million Br last year, registering an impressive profit growth of 109.9pc. What an auspicious year for these three banks!
Moreover, the three banks have experienced a significant growth in deposits, loans and advances, capital and assets, which, in turn, implies a considerable build–up of their balance sheet. So, the year was really the best time of profit growth for these three small banks, as the strong profit margin is an indicative of the banking business’ stability and future growth. Moreover, the higher profit growth portrays that the business model carried out by the banks during the year works right and will continue to keep the banks’ profitable moving forward, which will have a positive effect on the market and their share values.
With a strong profit margin, these small retail banks that mainly deal directly with individuals and small businesses will have some money to research and develop new financial products, market themselves widely, hire new staff, buy technology and equipment to modernise their operations and financial services.
At the end of the day, they have to provide good returns to their shareholders or investors, with the better yield on their assets and capital. The higher profit of these three banks is good news to the over 3,100 shareholders of Abay Bank, close to 11,000 investors of Enat Bank and about 6,700 shareholders of Lion International Bank. The shareholders of these banks would definitely see their equities or investment grow bigger and may have to plough back their dividends so that their monies and the banks will grow in tandem.
The higher profit growth is also good news for the National Bank of Ethiopia (NBE) the guardian of banks’ health, safety and soundness; and the government as it sees more tax revenue from the banks flow in into its coffers.
And with the continued strong profitability pattern of banks and a pretty handsome return of 3,040pc on equity or investment, their steady profitability growth strongly appeals to those who have money and can go out and buy shares right away in the sixteen private banks that float shares in the equity market. They wait for a year and earn an increased stream of income on the share capital they invested.