The Commercial Bank of Ethiopia has been approved to issue long-term bonds in a bid to strengthen its capital.
The Bank presented a bill to Parliament last week to raise its current capital by threefold to 40 billion Br. The funds will come from interest free and tax free government bonds. This will make CBE one of the most capitalized banks in East Africa. The bond is expected to be redeemed within 10 years after a five-year grace period.
“Despite the apparent benefits of having long-term debt in the capital structure of CBE, the best option is to increase the paid-up capital,” says Abdulmenan Mohammed Hamza, analyst at London Portobello.
The Ministry of Finance & Economic Cooperation (MoFEC) will issue the bonds on behalf of the government.
“Since raising such amount of money locally is a near-impossible task, MoFEC should have a realistic plan to raise the money; perhaps looking at foreign investors,” Abdulmenan suggested.
One of the reasons for the increase is the imbalance between the growth of assets and capital.
The Bank’s total assets surged by 27 pc to 384.6 billion Br last fiscal year. Capital increased five percent to 13.5 billion Br.
CBE’s total assets are twice that of the private banks in total. CBE’s capital makes up 3.5pc of its total assets; the private banks’ average is 12pc. This means CBE is the most under-capitalized bank.
The main reason for issuing long-term bonds is expanding balances and increased risk exposure, which has not been backed up by adequate capital. The same trend is visible in the Bank’s liability, which grew disproportionately with the bank’s capital. It showed a threefold rise between 2010/11 and 2014/15 despite a twofold increase in capital.
CBE’s total capital is twice that of the two biggest private banks, Awash and Dashen Banks.
The depreciation of the Birr against the dollar presented another major reason to boost CBE’s capital. Over the past five years, the value of the Birr against the dollar depreciated by five percent annually.
The request to boost capital comes a year after CBE merged with the-then Construction & Business Bank of Ethiopia. Since then its branches have increased from 965 to 1136.
The amalgamation, however, raised CBE’s capital by only half a billion, representing less than four percent of its capital at the time. However, some see the capital raise as a danger to competitiveness in private banking, fearing that smaller banks will be overtaken.
Bereket Simon, Board Chairman of the Bank for the past six years, argues differently.
“The rationale is not to compete with private banks,” he said. “Every bank has a distinct target.”
In 2016, the total capital of the banking system reached over 43 billion Br, of these the share of CBE was 31pc.
“The capital increase will reduce risk associated with disproportional growth of capital and deposit,” Bereket underscored.
CBE, established half a century ago, pioneered modern banking in the country. It commands 36pc over 3,185 bank branches stretched across the country.
Last year, it amassed a profit of 14 billion Br, which is close to one fifth of the industry’s aggregate profit.
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