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Business Correspondent
CBZ Holdings will unlock $68,7 million from its land bank through development and disposals.
Chief executive Never Nyemudzo told analysts last week that unlocking value from the land bank will fund long term projects.
“We will look at our land bank to fund some of the initiatives but overall in terms of funding and lines of credit we are cognisant of pricing risks so we keep monitoring the development so we do not remain with high priced liability when lowly priced funds are available elsewhere.”
The group is currently sitting on $230 million in credit lines but this will move up to $430 million once the $200 million Afreximbank bond has been concluded.
Mr Nyemudzo said the group had now established the CBZ Global Fund in Mauritius to be used as a channel to mobilise resources for funds to be used on its projects.
He also said the group was expanding its long term lines of credit to create room for customers to pay but they will be continuous review of the project pipeline to ensure quality of borrowers.
Sales of low cost housing are expected to start this month with infrastructure to be completed in September while parallel construction of units will be before the end of August.
The group had 1095 stands in Nehosho in Gweru, 284 stands in Chikanga Mutare and 400 stands in Kwekwe. The housing projects had been funded by a line of credit from Shelter Afrique.
“We consider the housing units to be very affordable, selling at $15 173,39 (2-rooms), $19 631,15 (3-rooms) and $23 945,15 (4-rooms) under a ten-year tenure.”
Monthly instalments at 15 percent are $213,59, $276,34 and $337,02 respectively.
Mr Nyemudzo said the group continues to operate under a difficult economic environment with the tight liquidity increasing the cost of funding.
To get around this, the group had strengthened its customer relationships and at the same time enhanced its collections on failed relationships.
“It is during these difficult times that you need to stay with the client so that they can also reciprocate that. We have created more customer solutions to enhance market presence and transactional volumes.”
The group had done 60 percent of last year’s transactions.
Mr Nyemudzo said the quality of earnings remains important and as such there was a continuous review of asset quality and more prudential provisioning system.
The NPL ratio had moved to 6,1 percent from 4,4 percent in December. The loan book, which Mr Nyemudzo said was of a quality nature was at $1,04 billion with the security value at $1,53 billion and security cover at 1,47 times.
Provisions were at $50,1 million from $35,9 million in December and the coverage ratio at 0,75 times. NPLs, which Mr Nyemudzo said are fairly spread rose to $66,8 million from $47 million in December.
“Our target as always is a 100 percent coverage ratio on the NPLs over and above security. However, we are hopeful impairments to remain below 8 percent until the end of the year.”
He said of the security value of $1,53 billion, $31,7 million was in cash cover, $796,5 million was mortgage security and $701,5 million was in other forms of security including NGCBs, cessions etc. Impairments on the P & L were at $7,6 million from $19,4 million in December.
Analysts comment on CBZ
Suffering from declining profitability and cash flows; CBZ still has a lot of issues to resolve as its NPLs are up $20 million from the same period last year to $66 million for the six months ending June 2014.
More worrying is the fact that the bank has another $230 million in what it classifies as Special Mention Loans, which in lay man terms are loans that are past due, never mind the technicalities the bank has thrown about.
Why should we be concerned? Well if a loan is past its due date the possibility of them being classified as NPLs is greater, especially if we were to factor in the current economic environment, which is characterised by increasing loan defaults; one of the symptoms of deflation.
To put it more simply we should expect to see a general increase in CBZ’s NPLs going forward. We said in the past that the bank was taking a lot of risk, and we believe that we have been vindicated as the NPLs, Special Mention Loans, and impairments pile up. The bearing these have on the bank’s liquidity risk profile is too serious to ignore.
If we look at the bank’s Liquidity Gap Analysis we see the bank’s coming short in some position and any further stress coming from increasing NPLs and impairments could cause a domino effect on the bank.
We strongly believe that there is need for management to focus on a strategy that should result in a drastic improvement in bank’s loan book in terms of its quality, never mind what Colin said in the article above.
What is more striking with regards to these released results is how the bank increased its total income yet there was a decline in operating efficiency and profitability.
This was as a result of increases in interest and operating expenses. We mentioned in our last analysis of CBZ that the bank had over 60 percent of its deposits in the form of; lines of credit, term deposits, savings, and interbank deposits which are all high cost funds.
As a result the bank’s interest expenses are very high at over $49 million with these high cost funds contributing over 90 percent of the total interest expenses.
We also note that the bank is seeing a decline in demand deposits which are the major source of low cost finance, maybe this is the deposit stability they told us about at the last analyst briefing.
We think that the bank needs to work on a strategy to improve these deposits as they are more cost efficient. This will no doubt improve the bank’s operational efficiency.
Let us now look a few reasons we believe have affected the bank’s financial performance and results of operations. Firstly we have a lot of capital tied up in Staff Loans, a whole $39 million, and another $10 million in loans to directors and key management.
Surprisingly the interest income earned from staff loans according to note 2 is $142,912. Maybe it’s a typo of some sort or we just can’t see properly.
We therefore need more disclosures in this regards for us to fully understand these staff loans and their implication on the operations of CBZ, and its profitability.
There is an opportunity cost to this and shareholders are paying the price. Secondly the bank has assets in the form of Investment Properties weighing down its efficiency. At $21,9 million the properties earned a paltry $721, 164 gross rental income.
Not even enough to fund the bank’s rentals which stand at $1.1 million. This we believe is a misallocation of capital.
Lastly key to increasing operating expenses is staff costs, renumeration of directors and key management, and administration expenses. We believe that key to improving the bank’s financial performance is a management team that reviews some of the above listed items.
We remain steadfast in our belief that CBZ will not grow its earning in its current form in the next two years. The group should look at expanding beyond our borders, and transform itself into a Pan-African bank.
That is the only way to grow its income and there are no two ways about it. CBZ should also look at raising more equity capital so as to improve its liquidity profile.
This will also unlock more value for shareholders going forward. The reality of the matter is that management should perform to the expectations of the owners of the business, and they in turn should not fear dilution. In the end it’s a two way street.
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