Banking Industry Finds Silver Lining Amidst Uncertainity

The nation’s private banks have achieved remarkable results during the first half year of the current fiscal year, despite a popular perception that the economy has been sluggish due to political instability and forex crunch.

Last year was challenging for the economy as the country was hit by a severe drought, which left over 10 million people in need of emergency assistance, and the registered economic growth was the lowest in a decade.

All the16 private banks, in their semi-annual performance, have reported robust growth in deposits, loans and gross profits.

Their total deposit skyrocketed to a little over 170 billion Br, showing a staggering 30pc increase compared to the same period last year. This amount has taken industry observers by surprise for what private banks mobilized in half year surpassed the total deposits they had collected the whole of the previous year.

“This is surprising considering the political instability, severe drought and economic slowdown of last year,” remarked Abdulmenan Mohammed Hamza, a financial analyst.

In the first quarter of the current fiscal year, the unrest in Oromia and Amhara regional states has reached its peak, where hundreds of millions of worth of investments were ransacked, vandalized and turned to ashes.

Some banks, such as Oromia International Bank (OIB), have reported that the unrest adversely affected their capability to reach their customers. OIB has 40pc of its branches located in Oromia Regional State.

“The unrest adversely affected the Bank’s ability to collect remittances,” an executive who works at OIB told Fortune a month ago. “The problem even continued into the first quarter of the current fiscal year, when the unrest reached at its peak.”

The unrest in Oromia also affected the Bank’s performance in advancing loans, according to this executive.

“It affected the bank’s capability to move liquid resources from most branches to least liquidated one,” he said.

Abdulmenan relates massive growth in deposits to unprecedented expansion in branches by private banks.

In the first half of the current fiscal year, Ethiopia’s private banks opened 305 branches, raising their total network to 2,355. Accordingly, one bank branch serves around 33,448 people in the country, lower by half from the ratio five years ago.

Cooperative Bank of Oromia (CBO) is also the highest performer in this stance, opening 62 branches in just half year period while Zemen, which advocates consumer segmentation, is with no branches opened during this period. Yet, a directive from the National Bank of Ethiopia (NBE) compel banks to increase their branch network by 25pc every year.

In the first half year of the fiscal year, the CBO turned out to be the bank with the highest growth in deposits. It has reported a 35pc growth to 11.4 billion Br in deposit since June 30, 2016. This represents close to seven percent of the industry’s total. As more deposit indicates more income, this could be a trend in reversal for a Bank which was hit by an eight-fold decline in its profit last year, due to an increase in the demand for letters of credit.

The growth in deposits is even higher than last year’s growth of 14pc.

OIB too has reported a 32.4pc growth in its deposit of 9.3 billion Br, which is higher than the industry’s average rate of growth.

“We’ve worked aggressively in our marketing campaign,” a communications officer for the OIB told Fortune.

But the three largest performers in deposits are Awash, Dashen and Abyssinia banks. Nonetheless, industry analysis shows that higher deposit growth in one year is accompanied by lower growth in the next. The average growth rate in deposits was 24pc over the past five years.

Some bankers believe growth in aggregate deposit may not necessarily translate to real growth.

“We’ve to see details to understand whether there is growth,” says a banker. “It might be due to the slowdown of economic activities.”

Another banking veteran, who used to work at the central bank, agree. But in part.

“If the growth in deposits is due to an improvement in savings, that is a positive thing,” he told Fortune. “However, if it was as a result of time deposit, it means that the money is not mobilized which implies there is a slowdown in investments. We should know the source of the deposits.”

The growth in deposits hugely varies across banks. The rate registered by big banks such as Awash and Dashen is lower than of the average rate registered by either medium banks or small banks.

On the other hand, the most efficient income earner in 2015, Lion International Bank, and Bunna Bank have reported the lowest nine percent of growth rate among all banks.

“The political unrest in some parts of the country in July and August, 2016 has affected our deposit mobilization,” said Hailay Haftu, director for Business Development & Corporate Planning Department at Lion Bank.

“We lost between 30 million Br to 55 million Br from our deposit,” he disclosed to Fortune.

Andualem Alem, a director at Awash Bank with a decade of experience, believes the problem has little to do with an economic slowdown as the majority of the population is unbanked.

“It’s not easy to mobilise deposit in countries such as Ethiopia,” he said. “Banks invest too much in order to get depositors.”

A senior executive at Bunna attributed the slow deposit growth to accumulated debt of the Bank.

“We paid a significant amount of money,” he said. “This has affected our profit growth.”

These are banks which have seen their profits dropped from the same period last year. Lion saw a profit decline by one million Birr to 188 million Br in the first six months of the current fiscal year, due to a slow growth in exports. Earnings from exports have declined by 49 million Br to a billion Birr.

As observed in Lion, Bunna also saw a decline in profit by 35pc in the half year period of the current fiscal year compared with the same period last year. The Bank has earned a gross profit of 92 million in just a half year period.

The gross profit of the industry has gone up by 14.6pc to 3.35 billion Br. This is much higher than last year’s growth rate of 8.6pc, perhaps driven mainly by increased loan disbursements.

The total loans and advances have increased by 25pc to 116.17 billion Br for the six months ended December 31, 2016. The industry has reported a growth rate of 32pc compared with a similar period last year, which is higher than last year’s annual growth rate of 23pc. This must have been driven by increased deposits mobilization and liquidity, a rise from net investments in five-year bonds issued by the central bank, which was due for redemption since the last quarter of 2015/16.

The directive compels banks to invest 27pc of their gross loans and advances in government bonds, which has caused a liquidity crises in some of the banks.

The Bank of Abyssinia has reported the highest rate in growth of 36pc, advancing close to 11.1 billion Br during the half year, whereas as the loan book at Zemen has shrunk by four percent, to 3.2 billion Br. However, Awash leads its peers advancing loans of 20 billion Br, followed by Dashen Bank 16.3 billion Br.

The loan to deposit ratio of the industry has increased to 68pc from 67pc over the past year, which indicates banks are earning as much from deposits. It was 64pc on June 2016.

This phenomenon has been observed across a number of banks, something industry insiders attribute to the seasonality of loan disbursements and recovery.

Awash has the highest loan to deposit ratio of 77pc, whereas Zemen has the lowest at 54pc.

“We’ve disbursed the collected deposit to earn more income,” said Andualem, the communications director of Awash. “This is one of our main priority in our five-year strategy launched last year.”

Even though loan to deposit ratio of the industry has shown a modest growth Abdulmenan thinks there is still some room for improvement.

With a gross profit of 22 million Br in just half a year, Zemen leads all the banks with a growth of 57pc, compared with the same period last year.

The two big private banks, Awash and Dashen, have reported gross profits of more than half a billion Birr each, representing 15pc of the industry.

Banking experts agree that the profit performance is pretty remarkable.


Dawit Endeshaw has contributed to this story

By Samson Berhane
Fortune Staff Writer

Published on Feb 16,2017 [ Vol 17 ,No 876]



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