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NMB Holdings reaps fruits of digitalisation

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NMBZ Holdings Limited, a local financial services company registered on the Zimbabwe Stock Exchange and London Stock Exchange, is reaping the dividends of its aggressive digitalisation process, an analysis of its financials by IH Securities says.

“The operating environment proved largely turbulent from a mix of the unstable exchange rate in the first half of the financial year and Covid-induced restrictions to FY20 (full-year 2020), affecting business operations,” IH Securities says in a report.

“Despite these impediments, net  interest  income  registered a 665%  growth y/y (year-on-year) from  ZWL$53.66m to  ZWL$410m, outperforming 348.49% annual inflation. The bank continued its aggressive drive to leverage on digitisation of its  services  with  fees and  commission  income  increasing 835%  y/y  to  ZWL$815.54m  from ZWL$87.24m. Resultantly, the group recorded a 499% y/y growth in revenue to ZWL$1.44bn in FY20 from ZWL$250.77m in FY19 bolstered by strong performance inthe digital banking platforms.”

The report says the group also benefitted from property fair value revaluations.

“Fair value adjustments on investment properties of ZWL$1.23bn drove operating income to ZWL$2.67bn up 498% y/y from  ZWL$447.39m  in  the  comparable  period.  Total  comprehensive income  for  the year net  of  tax registered  at ZWL$2.70bn  on  a  ZWL$891.19m revaluation  uplift  of  land and  buildings,” it says.  

“Operating expenditure for the period grew by 669% to ZWL$186.41m due to staff rationalisation costs and increased administration costs from measures taken to be compliant to Covid-19 regulations. 

“Cost-to-income ratio consequently registered at 30.2% in FY20 versus 23.7% in FY19. Investment securities, which comprised of treasury bills and government bonds, closed the period at ZWL$1.09bn, up 910% from ZWL$107.57m in FY19.

“Nevertheless, the bank has set maximum limits for investment securities in order to ensure that most of the funds are channelled towards the productive sectors of the economy. Loans and advances were up 356.12% y/y at ZWL$3.73bn, up from ZWL$817.96m in FY19 driven by the continued upward uptake in corporate loans. Loans and advances for the period were mainly concentrated in services (28% vs 24% in FY19) and agriculture and horticulture (23% vs 23% in FY19). Deposits for FY20 closed at ZWL$3.49bn, up from ZWL$1.19bn.” 

The reports say the bank maintained strict credit underwriting which led to a further drop in non-performing loans from 1.37% to 0.44%, albeit still higher than the sector average at 0.30%. Loan-to-deposit ratio resultantly fell y/y from 68.7% to 58.2% recorded in FY19. The board resolved not to declare a dividend as the group is firmly focused on achieving the revised minimum regulatory capital requirement of the Zimbabwean dollar equivalent of US$30 million for a tier-1 bank by 31 December 2021. 

“We are of the view that as inflation slows down, and post-lockdown operations scale up across the country, FY21 is expected to offer better prospects for the banking sector at large on account of increased economic activity. The RBZ is expected to maintain a tight grip on liquidity reducing some of the downside risk of another run of inflation which was affecting viability in the regulated sector,” it adds. 

“On the other hand, the central bank has also announced that banks that access the Medium-Term Bank Accommodation facility (MBA) can only on-lend the proceeds from the MBA Facility at a maximum 10% above the borrowing rate to ensure recovery of the productive sector effectively putting an interest rate cap of 40%. The material concentration of NMBZ loans and advances is within the services and agricultural sector and depending on their exposure to the MBA facility, this might mean limited return for the bank. 

“With stricter credit vetting measures, we do not foresee a drastic upswing in lending activity at the bank especially for retail clients with loans expected to grow 46% to ZWL$5.47bn. We forecast that interest income will continue punching below its weight in the composition of revenue in the short term. Net interest income for the period is anticipated to reach ZWL$839.41mn, up from ZWL$410.58mn reported in FY20.  It is our view that digital banking fees will continue to drive revenue as the banking experience moves from the brick-and-mortar business model and therefore forecast fee and commission income of ZWL$2.04bn for FY21, up from ZWL$815.54mn recorded in FY20. Revaluations in land and buildings should start to soften on account of stabilising exchange rates.”

The IH Securities report says NMB income will grow significantly.

“We are anticipating total income to close at ZWL$3.51bn for FY21, up from ZWL$2.67bn in the comparable period. We believe that operating expenses moderate on assumption that inflation maintains its current downward trajectory,” it notes. 

“We have therefore forecast opex of ZWL$1.05bn for FY20, up from ZWL$814.19bn in FY19.  Overall,  for FY20  net  income is  expected  to remain  flat  at ZWL$1.84bn,  marginally  up  from ZWL$1.81bn posted in as we do not explicitly expect a repeat of the tax credit in FY20. Deposits are expected to maintain an upward growth trajectory as a result of the bank’s aggressive deposit mobilisation efforts in pursuit of the broadening of the Bank’s target market segments. 

“We forecast a sharp correction in RoaE (return on average equity) from 91.4% in FY20 to 42.6% in FY21 and RoaA to moderate from 30.3% to 14.6% respectively. We estimate that NMBZ trades on a P/BV (+1) of 0.83x and P/E (+1) of 2.37x versus regional peers at P/BV 0.88x and P/E (+1) 2.87x. Resultantly, using a combined DDM and Static ROE model, we come to a target price of $9.85, yielding a downside  of  9.63%  at current levels. We therefore place a HOLD rating on NMBZ.”–Staff Writer

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