Bids for Bank Shares too Wild to Make Sense




With the resurgence of the private banking business in the economy in 1995, where Awash International Bank (AIB) was the pioneer private bank to commence operation that was solely confined to the state owned banks for over two decades, more and more private banks have joined the industry since then, numbering today 16.

And over the past two decades, these banks, coupled with the biggest state-owned bank, the Commercial Bank of Ethiopia (CBE), have shown a remarkable growth; banking landscape has changed in tandem with the high growth of the economy. All the commercial banks have persistently exhibited a steady upsurge in the key balance-sheet items such as assets, loans and bonds, investment, deposits, and capital, stimulating economic activities in the country.

As of June 30, 2016, total deposits of all banks, excluding the Development Bank of Ethiopia (DBE), grew to 435.6 billion Br; loans and advances went up to 231.3 billion Br; assets reached over half a trillion Birr; and total capital surged to nearly 42 billion Br, with a little over half of this paid up.

In profit, they have all continued to rise to the envy of other industries. They have expanded their outreach to tens of millions of people, opening–up many branches every year across the country. No less have they improved banking by introducing new products and services through the applications of financial tools and modern technologies. The banking industry’s contribution or added value to the economy is seen growing over time, accounting for 2.5pc of the gross domestic product (GDP). And the industry’s total asset constitutes nearly 40pc of the GDP during the last fiscal year, assuming the GDP figure for fiscal year 2015/16 at current market prices would be close to 1.5 trillion Br.

The banks have in the past found themselves in a pretty sound financial footing. Investors or shareholders were, hence, handsomely rewarded with a very lofty dividend payout ratio of between 30pc to 50pc. For instance, Dashen Bank has outperformed its peers, rewarding its shareholders a very large dividend payout ratio of over 80pc up until recently.

The fat dividends and handsome returns enjoyed by shareholders have enticed those that have real financial assets or monies to acquire shares in banks. Those that have already invested continue to plough back or re-invest their dividends in order to increase their equities or share amounts.

Due to the secured and the ability of banks to hand back relatively higher cash to shareholders than other share companies in the market, increasing number of people are developing the appetite to own equities in the private banks to earn a decent stream of income on their investments. Based on a study conducted three years ago, the number of individuals, business entities organizations, co-operatives, and unions that own shares with banks is estimated to surpass 90,000.

Recently, following the decision by the central bank, private commercial banks are floating shares to the public that were previously owned by native Ethiopians of foreign nationalities. The perception that banks offer generous returns on investments led to investors rushing to own shares offering unimaginable bid prices.

Taking the lead, Awash Bank has floated shares owned by native Ethiopians in three lots; the bids offered have turned so large, ranging from 1,551 Br to 20,137 Br for a par value of 1,000 Br for a share. Interestingly, two shares floated in the first and third lots have found generous bidders that seem to be convinced that it takes more money to make money.

In the first lot, a bidder has offered 28,000 Br for two shares valued at 2,000 Br, offering 14,000 Br for each. During the third lot, another bidder, not seemingly satisfied with this huge sum, has offered 40,274 Br for two shares worth 1,000 Br each.

What magic these four shares are? I wonder how this strategy of exorbitant bids offer for two shares would guarantee that it will keep the buyers financially secure for the rest of their lives. The alarming offers may sound good news to the government as it pours a good sum of money to its coffer. But the unprecedented amount of bids offer begs a question and demands explanations on the rationale behind the offers. It should also serve as a guide to the bidding level and possibly tame the odd shares market in the economy.

However, with the cut-throat competition in the industry and the wind heads that affect the economy, the business, the banking industry, and share portfolios, the dividend yields have come down over the recent years; as rainy days do not last forever.

In the business world, companies can deploy a range of accounting tricks to beef up earnings. They can come up with a new and grand strategic plans to paint a shining picture of the company’s future. In some instances, they are seen to engage in outright fraudulent activities as the case with ENRON and WorldCom has demonstrated. But as dividends come as real cash from bank accounts, it is not possible to deceive or conjure.

Companies with strong financial positions and real profits can pay dividends. Focusing on dividend payouts of a company made over several years, investors can decide which shares to consider from those that they feel like ignoring in their investment options.

Watching at trends, investors can ensure that the company they desire to have shares with is likely to keep paying out its promised dividends, known in the industry jargon “dividend paying ratio.” It is the percentage of earnings the company pays out as dividends, usually on annual basis. And sustainability in a dividend payout ratio is an important factor to an investor in seeing that the investment generates a stream of income to live on.

For instances, a dividend payout ratio of 100pc cannot be sustainable; at this rate, the company may ultimately runs out of money. And if paid, it may only happen in a very specific circumstance and year. Of course, a dividend payout ratio that is too low suggests the company is not returning much to its shareholders.

As a rule of thumb, dividend payout ratio in the range of 30pc to 60pc suggests that the company pays a generous dividend that leaves some breathing room in case of down sides in the economy and short-term market fluctuations. Investors with a desire to own shares may need to read their annual reports or statements to learn their short–term targeted dividend-payout ratio and tie their bidding to these targets. When a bank management announces a target and hits it consistently, it shows the bank has the earning power to stay on track and remain financially sound.

If, however, the dividend-payout ratio of a bank makes investors suspicious or feel to lack trust, then they definitely should dig deeper and play smart with their money in offering the bids to purchase a bank share.

Owning shares in banks is meant to generate a stream of income for shareholders, providing the financial security to enjoy life. It is important that investors first take a look at the dividend–payout ratios of the banks over the past several years and the short-term targeted ratios. This information should readily be available with the central bank for prospective buyers digest data before they bid.

As financial intelligence is vital in making wise decisions, investors need to seek help from certified financial planners before rushing to offer an absurd bid amount that does not make any sense; and pays back paltry amount for years to come. A rational investor who makes wise decisions on his investments should be able to recoup her investment in no more than 10 years. Investors’ true wealth is income; not the share amounts they have in the banks nor the balance in their bank accounts.



Published on Mar 11,2017 [ Vol 17 ,No 879]


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