eBusiness Weekly
Kudzanai Sharara
Taking Stock
CBZ Holdings has had a sterling run on the Zimbabwe Stock Exchange in 2020. As of yesterday the financial services giant was up 6 197,5 percent year-to-date.
With a market capitalisation of $30,16 billion as of yesterday, CBZ overtook Delta and many other big cap stocks to become the most capitalised counter on the equities market.
Now the question is, does CBZ deserve a spot as the ZSE’s top performer and most capitalised company?
CBZ is arguably the country’s second biggest financial services Group after Old Mutual. For the half-year to June its total assets stood at $58,6 billion with total equity at $9,9 billion. Total deposits were at $45 billion while loans and advances were at $12,2 billion, the biggest in the sector.
Here are some of the key performance indicators investors might be considering.
- Non-Performing Loans (NPLs)
NPLs indicate how much of CBZ’s loans are in the danger of not getting repaid. If interest from a loan is not received for a period of 90 days (3 months) then that loan account turns into an NPL.
Significance: A very high NPL ratio means that the bank’s asset quality is in very poor shape.
A high NPL value is a negative sign. CBZ’s NPL for the half-year to June 2020 was 14,4 percent (or $1,9 billion including loans under special mention) which is very high when compared to the market’s average NPL of 1,03 percent.
- Net Non-Performing
Loans (NNPL)
Banks consider the fact that some portion of the loans will go bad and that is part of the business.
To safeguard their loans, banks usually take some kind of guarantee like a mortgage, insurance, etc. before issuing the loan. Of CBZ’s loans, $6 billion worth are Government guaranteed, $7,6 billion worth are secured by notarial general covering bonds, $1,3 billion by mortgage bonds while $1,3 billion are secured by cash cover.
Net NPAs are those bad loan accounts that are not backed by any such collaterals and have very low chances of a recovery.
Significance: As compared to NPL, a very high NNPL ratio is a more defined indicator of the fact that the bank has a lot of bad loans. A high NNPA is a negative sign. However as for CBZ, with total collateral of $16,3 billion, it seems it has more than adequate cover for its loans and advances of $12,2 billion. It actually has a negative NNPL which is a good sign.
- Expected Credit
Losses Ratio (ECLR)
When banks recognise that certain loans are expected to go bad in the future, they provision some part of their profits towards covering the losses that may be incurred due to such bad loans. It’s like the bank’s own safety funds set aside to protect against any NPLs.
Significance: A high ECLR (above 70 percent) means that the bank has already taken care of most of it’s NPLs and it is not vulnerable to any surprises in loan defaults. A high ECLR is a positive sign.
CBZ had $1,1 billion worth of ECLR against $1,9 billion in NPLs (including $1,7 billion which is under special mention and not regarded as a NPL by the bank).
- Capital Adequacy Ratio (CAR)
CAR is the measure of a bank’s insolvency (failure) risk. It indicates how much capital does the bank have with respect to its liabilities and risk weighted assets.
In simple terms, it’s a ratio of how much you have with respect to how much you owe. RBZ defines the minimum CAR for all banks in Zimbabwe. Currently, for banks the CAR is 12 percent while CBZ’s capital adequacy ratio is above 58 percent.
Significance: CAR indicates the bank’s ability to meet its obligations. A higher CAR in relation to the minimum requirement as per RBZ means that the bank has sufficient capital reserves to absorb any losses in the future. A high CAR is a positive sign.
- Current and Savings
Accounts Ratio (CASA)
CASA is a ratio of the current and savings accounts to the total deposits a bank is holding. Total deposits include all forms of deposits like fixed deposits, recurring deposits, etc.
Current and savings accounts bear a very low interest rate while term deposits like FDs bear higher interest rates.
So it’s beneficial for the bank to have higher current and savings accounts as they have to pay less interest on those accounts. CBZ’s savings and wholesale deposits account for 90 percent of total deposits.
Significance: A high CASA indicates that the bank has a healthy number of current and savings bank accounts. A high CASA is a positive sign.
- Loan Deposit Ratio (LDR)
LDR measures how much portion of the total deposits (money of account holders) does the bank lend out to its customers as loans. Along with the depositors’ money, banks use their core capital to lend out loans.
LDR for banks in Zimbabwe was around 37,71 percent at the end of June 2020 while CBZ’s was 27 percent. This means the bank lent out $27 out of every $100 that it had in the form of customer deposits.
Significance: A higher LDR indicates that the bank is taking excessive risks by lending more while a low LDR such as CBZ’s one indicates that the bank is not using its money to full capacity. A very low LDR (below industry average) is a negative sign.
- Net Interest Income (NII)
A bank’s main business is lending money. It’s primary source of income is the interest it receives on the lent money. A bank also has to pay interest to its account holders. NII is the difference between interest earned from loans (assets) and interest paid on deposits (liabilities).
NII = interest earned – interest paid.
For the half year to June 2020, CBZ earned $979 million in interest from its loan accounts and paid out $259 million as interest to its account holders leaving a high NII of $720 million.
Significance: A higher NII indicates that the bank is doing good business and that it is able to generate higher profits. A higher NII is a positive sign.
- Net Interest Margin (NIM)
NIM is the measure of a bank’s profitability with reference to interest income and assets (loans).
NIM is affected by factors like the quality of loans the bank is issuing, central bank interest rates, etc.
A risky loan account may bear higher interest rates while a stable loan account may bear lower interest rates.
NIM = Net Interest Income (NII) / Assets (loans)
CBZ gave out total loans amounting to $12,2 billion and earns an interest (NII) of $720 million then its NIM stands at 5,9 percent. In 2017 net interest margins in the median African country were 6,8 percent according to the World Bank.
Significance: A higher NIM may indicate that the bank is taking undue risks while a low NIM may indicate that the bank is not operating at its peak performance. A very high NIM (above industry average) is a negative sign while a stable NIM is a positive sign.
