News Column

Barclays' Safe Bank Model Pays Off

February 13, 2014

BARCLAYS Bank of Zimbabwe reported a 40 percent growth in earnings in the year to December as the group's Safe Bank model, which they said is perfectly suited to the current environment, began to pay off. Earnings amounted to US0,14c per share, a 40 percent increase from US0,1c. The bottomline was up 38,9 percent to US$2,95 million.Managing director Mr George Guvamatanga on Tuesday told analysts the consistent Safe Bank model had paid off as it was designed to specifically be sustainable within the current environment.

He said the economy was currently showing strains with industry losing competitiveness against South African manufacturers while the huge debt overhang increased country risk. "At the same time the low disposable incomes had affected how we as a bank shape our strategy," he said.

Mr Guvamatanga said it had been a challenging year for the banking sector, which had to grapple with short-term deposits, a tight regulatory framework and high non-performing loans in the sector, which stood at an average 15,92 percent as at December 31. The control of bank charges, fees and interest rates after the signing of the MoU at the beginning of the year had curtailed the growth in income. Barclays total income only grew 5,29 percent to US$38,79 million due to the effect of the MoU. "This created challenges for an unstable banking sector," he said in reference to the MoU.

Mr Guvamatanga said the group's ability to apply consistent, high quality and strong risk management processes and controls had been key to the performance.

The pre-tax line grew 70 percent. "We sustained transaction volumes albeit amid the impact of the MoU on non funded income. Significant customer relationships were regained." Net interest income was up 61 percent to US$12,3 million "after interest rates converged to narrower range" while non-funded income fell 8,55 percent to US$11,6 million because of the effects of the MoU. However the increase in transaction volumes was the key driver of non-funded income.

Finance director Mr Sam Matsekete said the cost to income ratio had come off to 85 percent from 90 percent against 105 percent in F10. Operating expenses were flat at US$33,9 million (2012: US$34 million) as cost containment and efficiency initiatives continued. "But obviously we need to continue working on it." Staff costs/Operating costs was at 53 percent from 55 percent while NFI to total income was at 68 percent. The loan loss ratio at under 1 percent was kept low with the maintenance of a quality loan book. There was a steady growth in deposits and advances as the group leveraged on channel and services. Since dollarisation deposits have grown at an annual rate of 15 percent. In F13 deposits grew 10,3 percent to US$248 million. Trade and services made up the bulk at 32 percent while individuals were at 27 percent.

In line with the Go-To bank strategy the loan book had grown 26 percent to US$115,32 million whilst impairments remained below 1 percent. Mr Guvamatanga said the group had witnessed steady year on year growth since 2009 at an annual growth rate of 42 percent. Mr Guvamatanga said the group would continue to adhere to rigorous credit screening to minimise exposure to default risk.

On the split of the loan book, Mr Matsekete said the bulk at 38 percent were with light and heavy industry. Transport was at 29 percent and individuals at 17 percent. He added that they had deliberately chosen those segments with Mr Guvamatanga saying: "We just don't lend to anybody; but we lend to proven multi-national and large corporations. And those individuals are employees working for the corporations. We select for quality" In the period under review LDR was at 47 percent against a sector average of above 70 percent prior year comparative.

Liquidity ratio had come down slightly at 53 percent from 58 percent but Mr Matsekete added it was still above average and quite a strong position.

The group had closed with an almost similar level of cash as 2012 and is hopeful this would give them room to grow the business. On capital, Mr Matsekete said they will see internally generated capital and might not need an injection from the shareholder.

He said the group had improved adoption of e-channels leveraging high internet and mobile penetration. "We will continue to widen the product offering as a way of increasing transaction volumes to boost income.

The bank would continue leveraging from the Barclay Plc group and even from the ABSA group as the operations report to the latter. As a result of the synergies the group had facilitated US$40m offshore facilities.

Our thoughts on Barclays

The primary business of any bank is managing the spread between the cost of liabilities, and returns on loans, and other interest bearing assets. Given that, Barclays is one of the few banks that has taken a very cautious approach to managing this spread since the economy dollarised, and the distribution of its income is a reflection of this strategy. Barclays is also one of the few banks that has minimised exposures to interest and credit risks.

The current unstable operating environment has increased the probability of interest and credit risk and these can literally impel a banks' operational results and negatively affect its financial condition. Barclays has managed to maintain its robust asset structure whilst maintaining adequate liquidity and a sound risk profile. It is therefore not surprising that non funded income has been the main driver of the group's bottom income in the last 5 years.

Barclays has focused on growing transaction volumes and improving the quality of its loan book. This is one way the bank has overcome the impact of the yield curve since dollarisation. The bank has focused more on the fees they charge for services and became much less dependent on net interest income to drive earnings. This is the business model the bank has adopted and it is the key driver of its performance, more so in these latest results.

The group has clearly laid out performance targets and a consistent conceptual framework which in most cases is a sign of long term stability going forward. The bank has been consistent in its growth strategy and has a fairly good set of financial variables including its capital adequacy, asset quality, profitability and liquidity in comparison to its peers.

Barclays has now improved its disclosure levels and introducing higher levels of transparency through its financial statements. A sign of good corporate governance, and sound management, maybe! One critical element that has a bearing on Barclays' future growth prospects, share price and financial condition is clarity on IEE compliance within the banking sector. Whilst we do not anticipate any issue, failure to conclude this with the ministry has a bearing on the business to a certain extent.

Going forward Barclays looks set to maintain its growth strategy, strong market position, and performance. The bank strategy of cautious asset growth should see strong quality of earnings and no unpleasant surprises and thus investors should be well advised to buy into the bank without losing sleep.

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Source: AllAfrica

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