Tanzania Banking Sector Performance Review

Transcription

1 Tanzania Banking Sector Performance Review Year Ended 31 December May 2010 E 1

2 Foreword 2009 Tanzania Banking Sector Review is the third issue in the progression of Annual Performance Reports published by Ernst & Young. The review aims at highlighting and informing stakeholders performance and developments in the Tanzania banking sector. Despite the financial crisis challenges arising in 2008, the Tanzanian banking sector remained safe and stable during In general, the sector is satisfactorily capitalised, with paid up capital recording an increase of 39%, (15% in 2008). The banking sector assets increased by 19% with the ratio of earning assets to total assets at 79% (83% in 2008). The funding structure was mainly composed of deposits which increased by 24% and shareholders funds which increased by 28%. Furthermore, the banking liquidity was overall considered satisfactory, with the ratio of liquid assets to deposit at 58% (54% in 2008). Three banks entered the market in 2009: United Bank of Africa (UBA), Mkombozi Commercial Bank (Mkombozi) and Tanzania Women s Bank (TWB). Furthermore, this year s report has included The People s Bank of Zanzibar (PBZ) and Tandahimba Community Bank (TCB) and prior years performance have been adjusted to include these two. CRDB became listed in June 2009 at Dar es Salaam stock exchange. Also NIC Bank of Kenya acquired 51% of Savings & Finance Bank in September 2009 and in December 2009, I&M Bank acquired 100% of CF Union Bank This years report also comes with an article on agriculture finance as a topical issue. I thank everyone for making the 2009 report a success and wish to extend my thanks to banks and financial institutions for their great support and cooperation in the development of the report. Joseph Sheffu Country Leader

3 Abbreviations The report includes the following 38 institutions with their abbreviations used in the analyses: No Abbreviations Banks 1 Access Access Bank 2 Akiba CB Akiba Commercial Bank 3 Azania Azania Bancorp 4 BancABC African Banking Corporation 5 Bank M Bank M (T) Ltd 6 Barclays Barclays Bank (T) Ltd 7 BOA BOA Bank (T) Ltd 8 BOB Bank of Baroda 9 BOI Bank of India (T) Ltd 10 CBA Commercial Bank of Africa 11 CF Union CF Union Bank 12 Citibank Citibank 13 CRDB CRDB Bank PLC 14 DCB Dar es Salaam Community Bank 15 DTrust Diamond Trust Bank 16 Exim Exim Bank 17 Habib Habib African Bank 18 ICB International Commercial Bank 19 Kagera Kagera Farmers Co-operative Bank 20 KCB Kenya Commercial Bank 21 Kili Coop Kilimanjaro Co-operative Bank 22 Mbinga Mbinga Community Bank 23 Mkombozi Mkombozi Commercial Bank 24 Mufindi Mufindi Community Bank 25 Mwanga Mwanga Community Bank 26 NBC National Bank of Commerce 27 NMB National Microfinance Bank 28 PBZ The People's Bank of Zanzibar 29 S&F Savings & Finance Bank 30 Stan Chart Standard Chartered Bank 31 Stanbic Stanbic Bank (T) Ltd 32 TCB Tandahimba Community Bank 33 TIB Tanzania Investment Bank 34 TPB Tanzania Postal Bank 35 TWB Tanzania Women's Bank 36 Twiga Twiga Bancorp Ltd 37 UBA United Bank of Africa 38 Uchumi Uchumi Commercial Bank Please note FBME is excluded from the report because its financial statements include group s results. The currency of the data is in Tanzanian Shillings and can be converted to US$ at TShs. 1330: US$1

4 TWB, TCB and Kagera annual audited data could not be obtained, hence the data used in the report is from 2009 Quarter 4 results. For quarterly reports, we annualised the income statement to get the annual figures. Some banks did not disclose number of employees in the annual audited report; we have therefore used 2009 Quarter 4 figures. The report was prepared by Aza Suleiman (Business Advisor) and Chacha Winani (Manager), with oversight and guidance from Glenn Scott (Executive Director) and Moremi Marwa (Senior Manager) all from Transaction Advisory Services. Note that a separate quarterly data pack supplement is available on request. Copyright, Ernst & Young All rights reserved. Disclaimer Whilst care has been taken in compiling the report, Ernst & Young does not give warranty to either completeness or accuracy of data and information contained herein, as data in the report is based on publicly published financial results audited or quarter four results as the only source of information. We realize there may be other undisclosed factors which may account for a bank s performance. Therefore, we accept no responsibility for any reliance placed on or any losses incurred in using the report. May 2010 EY Contact Details Address: Ernst & Young Utalii House 36 Laibon Road, Oysterbay P.O.Box 2475 Dar es Salaam, Tanzania Tel: People Name Title Joseph Sheffu Country Leader Joseph.Sheffu@tz.ey.com Glenn Scott Executive Director - TAS Glenn.H.Scott@tz.ey.com Moremi Marwa Senior Manager - TAS Moremi.Marwa@tz.ey.com Chacha Winani Manager - TAS Chacha.Winani@tz.ey.com Aza Suleiman Business Advisor Aza.M.Suleiman@tz.ey.com

5 Table of Contents 1 STRUCTURE OF THE REPORT Overview Contents of the report BANKING SECTOR AND ECONOMIC OVERVIEW Economic overview Banking sector overview TOPICAL ISSUE IN THE BANKING SECTOR SECTOR S PERFORMANCE OVERVIEW PROFITABILITY Return on Assets and Equity EFFICIENCY Overview of the sectors efficiency Operating Efficiency Portfolio Yield and Yield to Operating Efficiency Staff Productivity Rates Paid on Funds Portfolio Quality CAPITAL ADEQUACY Capital Adequacy Overview Asset Structure Overview Funding (Liabilities) Structure Analysis Financial Soundness Liquidity Analysis Earnings Analysis... 27

6 List of tables Table 1: Summary of selected historical Macro-Economic figures... 3 Table 2: Snapshot of the Balance Sheet and percentage change for over 4 years... 9 Table 3: Snapshot of the Income Statement and percentage change for over 4 years Table 4 : Overview of Earnings & Profitability ratios for the past 4 years Table 5: Overview of efficiency ratios over the last four years Table 6: Portfolio Yield for peer groups Table 7: Earnings per staff in peer groups Table 8: Capital Adequacy overview Table 9: Balance Sheet Structure for the 4 years Table 10: Major components & % share of total assets Table 11: Large banks and their share of sector s Total Assets Table 12: Assets by peer group Table 13: Composition of total liabilities and % increases Table 14: Snapshot of Share Capital and % increases Table 15: Gross income increase

7 List of Figures Figure 1: ROAA for Banking Sector Figure 2: ROAA for the peer groups Figure 3: ROAE for peer groups Figure 4: Banking sector operating efficiency Figure 5: Peer group s operating efficiency Figure 6: Portfolio Yield: Banking sector Figure 7: Portfolio Yield to Operating Efficiency (%) Figure 8: Portfolio Yield to Operating Efficiency in peer groups Figure 9: Earnings per staff Figure 10: Staff income to staff portfolio Figure 11: Assets composition Figure 12: Funding composition Figure 13: Funding structure Figure 14: Peer group share of customer deposits Figure 15: Share of customer deposits among large banks Figure 16: Share of customer deposits among medium banks Figure 17: Share of customer deposits among NBFI s Figure 18: Share of customer deposits among small and regional banks Figure 19: Changes in capital structure Figure 20: Total capital to RWAs Figure 21: Liquid Assets to Deposit Liabilities... 27

8 1 STRUCTURE OF THE REPORT 1.1 Overview In this report, we compare banking sector institutions against each other and among peers in the groups. Peer groups used are as follows: Ernst & Young Banking Review - Peer Groups Definition Large Medium Regional & Small Barclays Access DCB Citibank Akiba CB Kagera CRDB Azania Kili Coop Exim BancABC Mbinga NBC Bank M Mkombozi NMB BOA Mufindi Stan Chart BOB Mwanga Stanbic BOI TCB CBA TWB CF Union Uchumi DTrust Habib ICB KCB NBFIs S&F TIB PBZ TPB UBA Twiga All areas of analysis have looked at performance across all institutions as well as performance among and within the peer groups. The analysis is focused on three areas namely: Earnings and profitability; Efficiency; and Capital adequacy. The full results for each bank for which all the ratios are used to measure the banks performance are presented in Appendix A. 1.2 Contents of the report To facilitate the reading of this report, the document is organised as follows: Section 2: Banking Sector and Economic Overview provides an overview of the entire banking sector in the country and historical economical performance. Section 3: Topical issue in the banking sector reviews agricultural finance in Tanzania. Section 4: Sector performance provides the country s banking sector performance. Section 5: Profitability contains a review and analysis of profitability of the institutions in the banking sector. Section 6: Efficiency contains a review and analysis of efficiency of the institutions in the banking sector. 1

9 Section 7: Capital Adequacy provides a review and analysis of capital adequacy and financial soundness of institutions in the banking sector in Tanzania. 2

10 2 BANKING SECTOR AND ECONOMIC OVERVIEW 2.1 Economic overview Prudent macroeconomic management along with substantial donor assistance has helped build and strengthen economic growth and fuel strong investment into the country. Real GDP growth has averaged 6.3% over the past four years. Most of this growth has been a direct result of pro - investment policies put in place by the Government, which has helped the country continue to attract foreign direct investment. In the past few years the government has intensified its efforts to develop non-traditional sectors such as mining and tourism to lower the economy s dependency on agriculture with some success and the results of these efforts has been forthcoming. Tanzania s medium outlook remains bright, backed by strong international support. The country is on a strong footing. Tanzania s economy is predicted to grow around 6.3% over the next five years, with manufacturing, mining and tourism sectors featuring strongly. An improved macroeconomic environment should attract already growing FDIs. Table 1: Summary of selected historical Macro-Economic figures Gross Domestic Product (GDP) Real GDP Growth % Nominal GDP (USD Billions) Nominal Per-Capita GDP (USD per Person) Population in Million Population Growth % Inflation Consumer Price Index Exchange Rate (TZS against US dollar) Year-end value 1, , , , Interest Rates Short-term Policy rate Trade and Current Account Trade Balance (USD Billions) Current Account Balance (USD Billions) Source: Global Insight 2.2 Banking sector overview In year 2009 there has been a healthy growth in the number of people who use banks. While the population has grown by 10% over the past three years ( ), the number of people holding a bank account has risen by 33% at the same period 1. However, despite the encouraging growth in the number of people with bank accounts, it only serves 9% of the adult population in Tanzania was banked by This indicates that the potential for growth in the banking sector is still high. Finscope s survey on the demand for, and barriers to accessing financial services in Tanzania revealed that there is 22% increase in people who used to use banks for 1 Finscope 2009 Survey on the demand for and barriers to accessing financial services in Tanzania. 3

11 savings, deposits, investments and loans but they do not now use banks. This is a lost opportunity for banks, and obstacles to access finance have been identified as: loans are perceived as not that relevant, hard to get or too difficult to repay; lack of enough money to bank and also the obstacles are too many to both save and/or invest with banks; and lack of knowledge on the banking services and products. Though the Tanzania banking sector enjoyed another year of satisfactory performance in terms of assets and funding growth, profitability and capital adequacy, the growth was much reduced in several areas measured when compared to It may be fair to say that growth in the sector has slowed down due to the effects of the global financial crisis and the economic slowdown. However, based on the historical performance over the past five years and the global financial crisis notwithstanding, growth appears poised to continue over the medium to long term. 2 Commissioned by the Financial Sector Deepening Trust (FSDT) 4

12 3 TOPICAL ISSUE IN THE BANKING SECTOR Agriculture Finance in Tanzania The agricultural sector plays a dominant role in the Tanzania economy, accounting for about 30% of the GDP, providing 70% of exports earnings, and employing 80% of the total work force. Agricultural products, most notably coffee, cashew nuts, cloves, and cotton, are Tanzania's most important goods for exports, accounting for approximately 85% of the total agricultural export earnings. The country also exports tea, sisal, tobacco, and pyrethrum. In Tanzania as a whole, only about 10% of people have access to financial loans from banks and other financial institutions, and the agricultural sector only accounts for 6% of the total lending activities. Historically, commercial banks have been reluctant to lend to small-scale farmers. According to the Finscope surveys (both 2006 and 2009) among the rural household who currently have loans, 84% indicated that they obtained loan through informal means, 8% through SACCOS, 3% through MFIs, 3% as business loans and 3% individual personal loans from banks. Part of the reasons for this trend are such as: lack of credit history, unpredictable demand for loans, lack of proper records, seasonality of farming, lack of education and skills and the lack of collateral (movable or immovable) to pledge for repayment of loans. Even plots which farmers use cannot be used as collateral because farmers do not legally own the land. Existing loan products for agriculture financing in Tanzania Inventory Collateralization & Warehouse receipt system is a system of facilitating commodity trade and finance whereby the depositor (a producer, a farmer group, a trader, an exporter, a processor, an individual or a corporate body) of the commodities (collateral) in a designated warehouse enables access to credit by the depositor. One of the aims for the establishment of the system is price stability. In Tanzania, the system is gaining popularity and success especially in crops such as cotton, coffee, sunflowers, cashew nuts, rice, soya beans and maize. A warehouse receipt system functions as one of the instruments involved in the transfer of ownership in both trades involving commodities as well as futures. The receipt (certificate of pledge) can be construed as a negotiable document, which can be made to the order of the company or the bearer of the document. A nonnegotiable warehouse receipt will only allow delivery to the person or business that is named as the owner in the document. Most warehouse receipts are issued in negotiable form, making them eligible as collateral for loans. In Tanzania, the Warehouse Receipts financing is governed by the Warehouse Receipt Act No 10 of 2005, warehouse regulation of 2006 and is monitored by the Tanzania Warehouse Licensing Board. Outgrowers financing system this form of agri-financing is based on a premise that a prominent positive result of commercialisation in small-scale agriculture is the engagement of agro-industrial firms as partners in production and marketing. Out-grower systems have been in existence for some time as a means of organizing the commercial production of both large-scale and small-scale farmers. Partnership between farmers, banks and agro-industrial firms is essential for the operationalization of this system of financing. With the liberalized marketing through the closing down of some of the marketing boards, private firms have become more involved in the out-growing using contract farming. 5

13 Under the contract farming system a central processing and exporting unit purchases the harvests of individual farmers, and the terms of the purchase are arranged through contracts. The terms of the contract vary and usually specify how much produce the contractor will buy and at what price. The contractor often provides credit inputs and technical advice. The basis of such an arrangement is the commitment of the farmer to provide a specific commodity in quantities and at quality standards as determined by the purchaser and the commitment of the company to support the farmer s production and to purchase the commodity. Agro-dealers (stockist) financing In Tanzania, the undercapitalization of agriculture contributes to a situation in which less than 15% of farmers use improved seeds and fertilizers. Under the agro-dealers financing system commercial retailers or wholesale agro-dealers who undertake to maintain agricultural input stocks for sale to farmers (mainly seeds, fertilizer, pesticides and herbicides) are financed and/or guaranteed through NMB/Norfund/AGRA/FSDT and are also strengthened through training AGRA/CNFA as part of the Tanzania Agro-Dealers Strengthening Program (TASP). Players in the Agricultural financing in Tanzania Currently, sources of agriculture financing in Tanzania are through banks and financial institutions, NGOs, Development agencies and the Government. Banks and financial institutions Currently there are only a few banks that are involved in agriculture finance; the most prominent ones are NMB, CRDB, EXIM Bank, FBME, Kilimanjaro Corporative Bank and TIB. NMB Bank NMB introduced agriculture finance in its loan products back in 2004 and has since experienced a sharp rise in a number of customers and loans specifically in the area of warehousing receipt finance. NMB has structured its agricultural loans as follows: Warehouse Receipt System, mainly financing coffee, cotton, sunflowers and cashew nuts. In operating this form of financing, NMB works closely with collateral managers, curing factories, ginneries, corporative societies and private companies; Out-growers financing schemes, under the scheme, NMB finances growers of tea, sugarcane, and barley and is working in joint ventures with tea and sugar companies for tea and sugar respectively and the Tanzania Breweries Ltd for barley. Agro-dealer (stockist) financing; Alliance for Green Revolution in Africa (AGRA), Financial Sector Deepening Trust Fund (FSDT), Citizens Network for Foreign Affairs (CNFA) and NMB are working closely with the Government (through the National Agricultural Input Voucher Scheme) as part of the Agro-Dealer Strengthening Program roll-out that has built a network of 840 agro-dealers focusing in giving farmers access to the government run fertilizer supply program. The program also provides innovative financing plan that strengthen and finances agro-dealers. As of December 2009, total loans disbursed for the agricultural sector by NMB accounted for 15% of its total loan portfolio. CRDB Bank Originally, CRDB s main objective was to finance rural and agricultural development projects. However, due to poor performance of many of its agricultural projects, the bank, in 1996 changed its operations to a fully fledged commercial bank with agriculture 6

14 financing projects in its portfolio. To date, the bank is still one of the main providers of agriculture finance in the country. The bank offers three main types of loan products in its agricultural financing window: (i) Agro-dealers (stockist) financing scheme; (ii) Warehouse receipt financing and (iii) Out growers financing schemes. However, most of CRDB lending activities to small business and agricultural related projects is done indirectly through SACCOS. CRDB s loans to agriculture are mainly for coffee, cotton, cashew nuts and tobacco. So far agriculture loans accounts for about 25% of CRDB s total loans distributed as 75% in cotton, 20% in coffee, 2% in cashew nuts and 3% for other crops. Exim Bank Exim Bank started offering agriculture finance in This was when the Government accredited the Bank with the Agriculture inputs fund following the bank s primary efforts of developing the agricultural sector in the country through loan financing. In the same year, the bank offered Tshs. 3 billion as agricultural inputs fund for financing agriculture. Since then, the bank has been giving loans to the farmers either through their SACCOS/AMCOS or directly to individual farmers and private companies. The bank is an active participant in financing procurement, processing and packing of various export crops, mainly coffee, cashews and cotton as well as non-traditional crops such as sesame and pulses. The bank also finances procurement and distribution of fertilizers and other agricultural inputs to ensure growth and sustainability of such crops. The bank provides two categories of loans namely: (i) Security based loans; and (ii) Commodity based loans. FBME Bank has directed about 20 per cent of its total loan portfolio towards agricultural development in Tanzania. The bank offers credit to small and medium agricultural farmers mainly in Morogoro through warehouse receipt system. FBME works closely with warehouse operators, union of crop growers association, SACCOs and rice growers particularly in Ifakara to ensure that loans schemes for farmers are working efficiently. Tanzania Investment Bank following TIB recapitalisation in 2007, part of the bank s loan portfolio was set aside in order to support farmers, about Tshs. 3 billion. Also the Government directed funds that were returned to the Bank of Tanzania External Payment Arrears (EPA) account to the enhancement of agricultural and livestock activities through TIB. Also, negotiations are underway between the Bank of China and the Tanzania Investment Bank to help the bank develop credit lines for farmers, the move aims at enhancing the TIB services to the farmers. So far TIB have been supporting the floriculture sector for production of roses for export. The bank provides funding to the agriculture sector through community banks, SACCOS, NGOs and corporate agriculture. Other Financial institutions Apart from MFIs such as Pride, FINCA, Dunduliza, etc other most dominant financiers to the agriculture sector are member-based organizations such as Savings and Credit Cooperative Societies (SACCOS) and the Agricultural Marketing Co-operative Societies (AMCOS). Owing to the poor access of formal financial services in the rural areas, the formation of SACCOS and AMCOS was advocated and encouraged by the Government as one way of promoting access to financial services. Members of these schemes usually reside in the same village, and rely on the same primary cooperative society for crop sales. Farmers under this scheme open a group share account with a convenient bank catering for their needs in the area. Crop sales are paid to farmers through this account. 7

15 Development agencies and NGOs Other major players in the Tanzanian agriculture sector are development agencies and NGOs, most prominent ones being the EU, USAID, World Bank, Norfund, Tanzania Gatsby Trust, AGRA, Private Agriculture Sector Support (PASS), CNFA, FSDT, Technosave, JCS Technologies and others. Their role varies from financing technical training to farmers and agro-dealers, research on agro-technology, access and market linkages to financing and providing guarantee cushions against losses that could result from defaulted agricultural loans. The Outlook The Tanzania National Business Council (TNBC) s two days meeting that was held on 2nd and 3rd June 2009, among others, resolved to embark on KILIMO KWANZA as Tanzania s Green Revolution to transform its agriculture into a modern and commercial sector. KILIMO KWANZA comprises the following ten actionable pillars: Political will to push for agricultural transformation; Enhanced financing for agriculture; Institutional re-organisation and management of agriculture; Paradigm shift to strategic agricultural production; Land availability for agriculture; Incentives to stimulate investment in agriculture; Industrialisation for agricultural transformation; Science, technology and human resources to support agricultural transformation; Infrastructure Development to support agricultural transformation; and Mobilisation of Tanzanians to support and participate in the implementation of Kilimo Kwanza. With the political willingness, the agriculture sector might attract investors and increase financiers appetite and a better appreciation of the sector. Commercially run large farms might consider raising long term finance through IPOs the same as KAKUZI, REA VIPINGO or SASINI in Kenya which are listed in the Nairobi Stock Exchange. As per the Kilimo Kwanza pact, the following are efforts that if implemented might see a substantial increase in agricultural finance in the near future: the government intends to increase the budgetary allocation to the sector to reach a minimum of 10% from the FY2010/11; efforts are underway, within the supervision of the Bank of Tanzania, to establish the Tanzania Agricultural Development Bank (TADB) that will start with a minimum capital of US$ 500 million; efforts are underway to establish special agricultural development finance window in banks such as Tanzania Development Bank, Tanzania Postal Bank, etc with minimal restriction to financing access by commercial farmers; there are efforts by the Government to negotiate with pension funds so that pension funds can start lending to commercial farmers, with minimal restrictions; the Unit Trust of Tanzania is considering setting up the Vision Tanzania Fund, a venture capital fund that will specialise in providing SMEs long-term financing for the agricultural sector and other processing and manufacturing sectors. It is a fact that Tanzania needs innovative, long-term and large scale financing facilities to enable the agricultural sector play a greater role in the economic development and poverty eradication in Tanzania. The Kilimo Kwanza broad based and wholesale initiative, if implemented can be a break through towards achieving the goal. 8

16 4 SECTOR S PERFORMANCE OVERVIEW As at 31 December 2009, the Tanzania Banking Sector had 27 commercial banks, 8 regional unit financial institutions, and 3 financial institutions making a total of 38 banking sector organisations. This excludes Efatha Bank (only recently started and 2009 data not available) and FBME (whose activities are substantially outside Tanzania and Tanzania segment results are not produced). Table 2: Snapshot of the Balance Sheet and percentage change for over 4 years Balance Sheet (Amounts in millions of TZS) % Change Cash and balances with BoT 1,412, , , ,101 64% 16% 56% Balances with other banks 1,458,818 1,113,656 1,258,543 1,070,840 31% -12% 18% Investment in Government securities 1,638,858 1,450,900 1,359,670 1,175,796 13% 7% 16% Investment in debt securities 80,612 97, ,821 38,610-18% -60% 531% Loans, Advances & Overdrafts 4,534,133 4,163,019 2,833,031 2,214,343 9% 47% 28% Other assets 691, , , ,338 17% 27% 47% Total Assets 9,817,249 8,276,512 6,903,832 5,294,029 19% 20% 30% Customer deposits 7,906,566 6,400,796 5,229,454 4,239,597 24% 22% 23% Deposits from other banks 253, , , ,303-28% -31% 100% Other liabilities 408, , , ,138-26% 43% 40% Total Liabilities 8,568,473 7,302,720 6,125,408 4,769,037 17% 19% 28% Paid up share capital 407, , , ,725 39% 15% 44% Retained earnings (current & prior years) 720, , , ,512 27% 31% 53% Other shareholder funds 121, ,623 91,232 64,755 6% 26% 41% Total Shareholder Funds 1,248, , , ,992 28% 25% 48% Total assets increased to TZS 9,817,249 million representing an increase of 19% in 2009 compared to 20% (2008) and 30% (2007). This is similar to changes in broad money supply and 10% above the absolute levels of money supply. What is noticeable in 2009 is the low (single digit) growth in loans and advances and restricted availability to invest in Government securities (up 13% in 2009) leading to excess liquidity and higher placements on the inter-bank market (up 31% in 2009). The large group still dominates the market measured by total assets though the annual share continues to decline as in previous years. Their share of total assets was 77.9% compared to 80.4% in 2008 and 82.8% in Medium group continues to eat into the large bank group share where their total assets to the banking sector have increased to 17.6% in 2009 from 15.5% in 2008 and 12.7% in NBFI s and Regional & Small continue to hold a market share of around 3% and 1% respectively. The growth in assets has been financed almost entirely by an equivalent monetary increase in customer deposits (which continued to grow at around 24% in 2009) and only partly by the increase in shareholder funds (28% in 2009) thus resulting in improved liquidity and capital adequacy ratios. 9

17 Table 3: Snapshot of the Income Statement and percentage change for over 4 years Income Statement (Amounts in millions of TZS) % Change Interest income 787, , , ,222 16% 12% 38% Interest expense 204, , , ,043 32% -4% 51% Net Interest Income 582, , , ,179 11% 18% 34% Bad debts written off -2, , % -77% -36% Provision for bad & doubtful debts -71,380-28,181-17,611-53, % 60% -67% Non-interest Income 323, , , ,387 24% 17% 30% Foreign exchange gain/loss 122,027 91,389 73,976 44,422 34% 24% 67% Fees, commissions & other income 177, , , ,229 18% 14% 26% Other Income 24,139 19,102 18,011 23,737 26% 6% -24% Gross Income 831, , , ,207 10% 17% 44% Non- interest expense 530, , , ,762 16% 31% 34% Taxation -84,305-90,401-89,072-56,507 Net Income after tax 217, , , ,938 4% 0% 60% Number of employees 9,801 9,020 7,776 6,167 9% 16% 26% The income statement also shows that income growth (10% in 2009) has not matched asset growth (19% in 2009). This is due to firstly some pressure on net interest margins and secondly to the large increase in bad debt provisions. Also with non-interest expense increasing by 16% in 2009 this has impacted bottom line profits which only grew 4% in

18 5 PROFITABILITY Profitability analysis can use a number of different ratios such as those presented in table 4 below. Bank profits are affected by a number of key areas including: asset utilisation, interest rates earned and paid and expense base. Asset utilisation has fallen in 2009 as seen by the decline in earning assets to total assets (79% in 2009 from 83% in 2008), loans and advances to total assets (46% in 2009 from 50% in 2008) and gross loans to deposits (59% in 2009 from 66% in 2008 well below the regulatory 80% threshold). Net interest margin has also fallen (13.4% in 2009 from 15.0% in 2008) as has interest margin to average earning assets (8.0% in 2009 from 8.4% in 2008). Non interest expense to gross income has also fallen slightly (48% in 2009 from 49% in 2008). The above factors have resulted in flat sector earnings after tax in monetary values in 2009 (as was the case in 2008). This performance is reflected in ROAA and ROAE ratios which have decreased to 2.4% in 2009 from 2.8% in 2008 for ROAA and to 20% in 2009 from 24% in 2008 for ROAE. Table 4 : Overview of Earnings & Profitability ratios for the past 4 years Tanzania Banking Sector (Total) Earnings & Profitability Ratios Loans & Advances to Total Assets 46% 50% 41% 42% Non Interest Expense to Interest Income 67% 67% 58% 59% ROAA 2.4% 2.8% 3.4% 2.5% ROAE 20% 24% 32% 25% Interest Margin to Average Earning Assets 8.0% 8.4% 8.7% 7.4% Non Interest Expense to Gross Income 48% 49% 42% 43% Gross Loans to Deposits 59% 66% 56% 54% Interest Income to Total Income 71% 72% 73% 72% Interest Margin 74% 77% 73% 76% Earning Assets to Total Assets 79% 83% 83% 85% Net Interest Margin 13.4% 15.0% 17.6% 15.0% Total Expenses to Interest Income 93% 90% 85% 84% The majority of banks (28 of 38) reported profits in 2009 results with the exception of the following 10 banks: KCB, Barclays, S&F, Access, UBA, Mbinga, Kili Coop, TWB, Mkombozi and TCB, which recorded losses before and after tax. In mitigation, Access, UBA, TWB, Mkombozi and TCB are still in their start up stage of operations. Noticeably, Bank M this year has managed to report profit after tax of TZS 522 million in its second full year of operation. For the other five loss-making banks a number of factors are relevant including: high levels of loan loss provisions and non-interest expense in excess of total income. 5.1 Return on Assets and Equity 3 The sector average for Return on Average Assets (ROAA) has remained above 2% for the past four years; 2009 (2.4%), 2008 (2.8%), 2007 (3.4%) and 2006 (2.5%) though currently declining. As would be expected Return on Average Equity (ROAE) shows a parallel trend currently standing at 20% in 2009 down from the high of 32% in The ratios have been calculated using Post Tax Profit 11

19 As can be seen on the chart below, the top six performing banks in ROAA were Citibank (5.7%) followed by NBC (3.4%), CF Union (3.4%), NMB (3.1%), DCB (3.1%) and CRDB (2.8). Similarly, for the ROAE the highest performing banks were: NBC and NMB at 27%, CRDB, StanChart and CF Union at 26% and Citibank at 25%. Figure 1: ROAA for Banking Sector Taking into consideration the peer groups comparison, the large group still leads in ROAA in all the four years than other groups as shown on the chart below: Figure 2: ROAA for the peer groups The table above shows that ROAA in 2009 for Medium, NBFIs, Regional & Small Banks have converged around 1% while that of large banks remained well above them (at 2.8%) In the last four years large group had the highest ROAE in the sector. In 2009, Large banks had a ROAE of 24%, Medium had a ROAE of 7% and NBFI and Regional & Small were at 5%. It is noted that the sectors ROAE decreased this year (at 20%) compared to previous year (at 24%). The decrease can be attributed to increased shareholders funds. The following chart depicts the trend of declining ROAE ratios over the past three years for all peer groups. 12

20 Figure 3: ROAE for peer groups 13

21 6 EFFICIENCY Efficiency is vital to bank operations as it directly translates into profitability. As a result of this, efficiency ratios and profitability ratios are interrelated. This direct relationship between these two types of ratios will mean that whenever there is increased efficiency, there will be increased profitability. Various ratios can be used to measure efficiency of a bank. Some of those ratios are provided in the table 5 below. 6.1 Overview of the sectors efficiency The sector s average operating efficiency in 2009 was 12% which was up by 1% compared to that of This indicates that in general, the sector has become less efficient in its lending operations compared to These results reflect in the decreased profitability as shown in section 5. Table 5: Overview of efficiency ratios over the last four years Tanzania Banking Sector (Total) Efficiency Ratios Operating Efficiency 11.8% 11.4% 12.3% 11.0% Average Loan Portfolio (TZS in Millions) 4,348,576 3,498,025 2,523,687 2,214,343 Loan Portfolio per Staff Earnings per Staff Staff Income to Staff Portfolio 6.9% 8.6% 11.8% 8.5% Portfolio Yield 13.0% 12.9% 14.8% 13.4% Gross Yield on Earning Assets 10.8% 10.8% 11.9% 9.7% Rates Paid on Funds 2.5% 2.3% 2.8% 2.4% Portfolio Yield to Operating Efficiency 1.2% 1.4% 2.5% 2.3% Yield to Rate on Funds 10.5% 10.6% 12.0% 11.0% Govt Securities as % Earning Assets 22.0% 22.7% 28.1% 27.0% 6.2 Operating Efficiency From the chart below, it can be seen that, the most efficient banks in 2009 were: BOB (6%), Citibank( 6%),CF Union (8%), Habib (8%) and Stanbic(9%). On the other hand, the least efficient banks were UBA (126%), TCB (39%), TBP (37%), Access (32%),Mbinga (30%) and Mufindi (28%). The high inefficiency ratio for UBA is because the bank started its operations in the last quarter of Among the large banks, Citibank was the most efficient at 6% followed by Stanchart at 9%. The least efficient banks in this group were Barclays and NMB at 15% and 14% respectively. In the medium banks group, BOB was the most efficient bank followed by CF Union and Habib at 8%. The least efficient banks (apart from UBA) were Access and Akiba at 32% and 24% respectively. 14

22 Figure 4: Banking sector operating efficiency Generally, large banks were most efficient in the sector while NBFI s were the least efficient as provided in the chart below: Figure 5: Peer group s operating efficiency 6.3 Portfolio Yield and Portfolio Yield to Operating Efficiency Portfolio Yield tells what the bank has earned on its loans & advances portfolio 4. In 2009 the sector s average Portfolio Yield was maintained at 2008 levels at 13%. As shown on the chart below, banks with the highest yield were Mufindi (31%), TPB and Access (25%), Akiba and UBA (22%), Mbinga (20%) and NMB and DCB(19%). NMB had 4 This ratio includes Interbank loans in its calculations 15

23 the highest yield among the large banks group. This could be due to the type of customers that the bank serves which are considered riskier compared to corporate customers that the rest of the large group banks serve. Figure 6: Portfolio Yield: Banking sector The chart below shows portfolio yield among the peer groups over the last four years Table 6: Portfolio Yield for peer groups Portfolio Yield to Operating Efficiency is a ratio in which the yield is compared to the costs incurred to generate that yield. The sector s average yield to operating efficiency ratio for 2009 was at 1.2% (1.4% in 2008). The banks with the highest ratios were TIB (6%), NMB (5%), NBC, CF Union, DCB, Mufindi, Mwanga and Uchumi at (3%). 18 out of 38 banks had negative ratios. The two charts below show portfolio yield to operating efficiency for individual banks and peer groups: 16

24 Figure 7: Portfolio Yield to Operating Efficiency (%) In terms of peer groups, in 2009, only large banks group and Regional and Small banks have been reporting positive Portfolio Yield to Operating Efficiency for the last four years as per the chart below. Figure 8: Portfolio Yield to Operating Efficiency in peer groups 6.4 Staff Productivity Staff productivity is one of the ratios which measures efficiency. In theory, it measures each staff s contribution to profitability. Earnings per staff for the sector was TZS 31 million with Citibank having the highest earnings per staff at TZS 579 million, followed by Stanchart(TZS 84 million), CF Union (TZS 61 million), BOB (TZS 60 million)and Stanbic (TZS 49 million). The least efficient bank in terms of earnings per staff was UBA (TZS -60 million) followed by TWB (TZS -27 million), Mkombozi (TZS -26 million), TCB (TZS -12 million)and Kili Coop (TZS -12 million). The chart below shows earnings per staff for all banks. 17

25 Figure 9: Earnings per staff Large banks group had the highest earnings per staff at 40 followed by Medium, NBFIs and Regional and Small at 9, 6 and 5. The following chart provides peer groups earning per staff. Table 7: Earnings per staff in peer groups The other staff productivity-related ratio is the staff income to staff portfolio which shows the net income each staff earned in percentage terms from the average portfolio each theoretically manages. The ratio has been calculated by using two ratios namely; net income per staff and portfolio per staff. The average staff income to staff portfolio ratio for the whole sector was at 7% (9% in 2008). Large group banks leads in staff income to portfolio as per the chart below. 18

26 Figure 10: Staff income to staff portfolio 6.5 Rates Paid on Funds Rates paid on funds shows the average rate a bank pays on borrowed funds. In the Tanzania Banking sector, customer deposits make up most of the funds borrowed. In 2009, the sector rates paid on funds ratio averaged at 2.5% (2008 was at 2.3%). The banks which had the highest rates on funds were; Azania (7.5%), DCB (6.7%), Mwanga (6.2%), Bank M (5.8%) and BancABC (5.7%). On the other hand, the least expensive ones were Mkombozi (0.3%), UBA (0.8%), NMB (0.9%), TWB (1.0%) and Stanbic (1.2%) 6.6 Portfolio Quality The sectors provision for bad and doubtful debts have increased to 153% (60% in 2008), actual bad debts written off increased by 1273% (77% decrease in 2008). Non-performing loans to gross loans & advances showed the sector an average of 6.4% (in 2008 was at 4.2%). 19

27 7 CAPITAL ADEQUACY 7.1 Capital Adequacy Overview Capital adequacy can be analysed using various ratios as provided in table 8 below. In general Capital Adequacy ratios improved compared to Table 8: Capital Adequacy overview Tanzania Banking Sector (Total) Financial Soundness Ratios Non-Performing Loans to Gross Loans & Advances 6.4% 4.2% 6.1% 5.2% Total Capital to RWAs 20.8% 19.0% 19.6% 16.9% Core Capital to RWAs 19.6% 17.4% 18.0% 15.6% Interest Margin to Gross Income 53% 56% 53% 54% Liquid Assets to Total Assets 48% 44% 54% 54% Liquid Assets to Deposit Liabilities 58% 54% 65% 63% Total Capital to Deposit Liabilities 15.3% 14.2% 13.6% 11.6% Capital Adequacy 12.7% 11.8% 11.3% 9.9% 7.2 Asset Structure Overview The balance sheet size has increased to TZS 9,817 billion in 2009 from TZS 8,276 billion in 2008 representing a 19% increase. On the other hand, deposits increased by 24% (23% in 2008) Table 9: Balance Sheet Structure for the 4 years Amounts in Billions of TZS Dec-09 % Change Dec-08 % Change Dec-07 % change Dec-06 Loans, Advances & Overdrafts 4,534 9% 4,163 47% 2,833 28% 2,214 Customer deposits 7,907 24% 6,401 22% 5,229 23% 4,240 Total Assets 9,817 19% 8,277 20% 6,904 30% 5,294 Loans and advances represented 46% of the sector s total assets which was lower than the 50% in This was followed by investment in Government Securities (17%) which dropped from 18% in Inter-bank loans represented 15% of total assets, up from 13% in Table 10: Major components & % share of total assets Amounts in Billions of TZS Dec-09 % share Dec-08 % Share Dec-07 % Share Dec-06 % Share Balances with BOT 905 9% 402 5% 370 5% 237 4% Interbank balance 1,459 15% 1,114 13% 1,259 18% 1,071 20% Investment in Govt securities 1,639 17% 1,451 18% 1,360 20% 1,176 22% Loans, Advances & Overdrafts 4,534 46% 4,163 50% 2,833 41% 2,214 42% Total 9,817 8,277 6,904 5,294 The dominance in assets share of the Top 8 continues to decrease from 80% in 2008 to 78% due to the medium group taking share from them and the entry of a number of new banks since See the table below. 20

28 Table 11: Large banks and their share of sector s Total Assets Barclays 4% 7% 7% 6% Citibank 4% 4% 6% 9% CRDB 19% 18% 17% 17% Exim 6% 6% 5% 5% NBC 13% 14% 14% 15% NMB 17% 17% 17% 15% Stan Chart 9% 10% 9% 11% Stanbic 6% 6% 7% 6% Total 78% 80% 83% 84% Six banks increased their assets significantly: TCB (152%), Access (149%), BOI (119%), Bank M (58%), CBA (56%), and DCB (50%). The only bank that decreased its assets was Barclays (20%). Large banks group still dominates the banking sector as per the table below: Table 12: Assets by peer group Amount in millions of TZS Large 7,668,696 6,663,505 5,714,641 4,462,185 Medium 1,722,985 1,284, , ,171 NBFIs 323, , , ,226 Regional & Small 119,364 76,281 58,091 48,447 Total Sector 9,834,346 8,284,206 6,903,832 5,294,029 In terms of asset composition, loans, advances & overdrafts comprise the largest portion of the sectors balance sheet as per the chart below: Figure 11: Assets composition 21

29 7.3 Funding (Liabilities) Structure Analysis Customers deposits were the largest component in the funding structure at 81% up from 77% in Core capital contributed 12%, other liabilities 4%, deposits from other banks 3% and other capital 1%. Customer deposits were up by 24% compared to 2008 which showed only a 23% increase. The increase was due to entry of new banks and increased customers base for the banking sector. Table 13: Composition of total liabilities and % increases % Amounts in Billions of TZS 2009 Share 2008 % Share 2007 % Share 2006 % Share Customer deposits 7,907 67% 6,401 77% 5,229 76% 4,240 80% Deposits from other banks 254 2% 351 4% 511 7% 255 5% Other Liabilities 408 3% 551 7% 385 6% 274 5% Core Capital 1,173 10% % % 483 9% Other Capital 76 1% 83 1% 62 1% 42 1% Total 11,826 83% 8, % 6, % 5, % Figure 12: Funding composition The chart below shows the funding composition over the past four years. 22

30 Figure 13: Funding structure Below are the Peer group s percentage shares of customer deposits. Figure 14: Peer group share of customer deposits The following chart shows institutions in the banking sector share of customers deposit 23

31 Figure 15: Share of customer deposits among large banks Share of customers deposits among medium banks is given in the chart below: Figure 16: Share of customer deposits among medium banks Share of customers deposits among NBFIs is provided in the chart below: Figure 17: Share of customer deposits among NBFI s 24

32 Share of customers deposit among Small and Regional Banks is provided below Figure 18: Share of customer deposits among small and regional banks. The four peer group tables above show the percent share of each bank within its peer group and how that has changed in the period In 2009 customer deposits for the sector increased by TZS 1,505 billion (24%. Four of the banks accounted for 60.6% of this being CRDB (TZS 348 billion), NMB (TZS 259 billion), Stanbic (TZS 160 billion) and NBC (TZS 146 billion) 7.4 Financial Soundness During 2009, the sector aggregate capital (Total Shareholders Funds) increased by 28%, (25% in 2008). The increase was mainly contributed by retained earnings 30% (28% in 2008) and paid up share capital 39% (14% in 2008). Table 14: Snapshot of Share Capital and % increases Amounts in Billions of TZS 2009 % Increase 2008 % Increase 2007 % Increase 2006 Share capital % % % 200 Retained earnings % % % 195 Profit and Loss % % % 87 Other capital 76-8% 83 34% 62 47% 42 Total Shareholders Funds 1,249 28% % % 525 The chart below shows changes in the capital structure 25

33 Figure 19: Changes in capital structure In relation to Risk Weighted Assets (RWAs) and off balance sheet items the sector average for core capital to RWAs was 20% and for the total capital to RWAs it was 21%.These are well above the statutory minimum of 10% and 12% respectively. Two banks were below the minimum. Financial soundness has also been measured using total capital to total deposits liabilities which has a statutory minimum of 8%. The sector average ratio was 15%. Again, this is very comfortably above the minimum. Individually only one bank was below the minimum. Figure 20: Total capital to RWAs 7.5 Liquidity Analysis The sector recorded an overall ratio of liquid assets to total assets of 48% (44% in 2008). The liquid assets to deposit liabilities ratio was 58%, (54% in 2008). All banks were above the minimum. This high sector ratio is contributed partly by low lending and new entrants with very high liquidity ratios (UBA 457% and Mkombozi 336%) 26

34 Also, the practice appears to be for several banks in Tanzania tend to keep substantial amounts of their deposits in the form of inter-bank placements and short-term Government and debt instruments instead of lending. The ratios grew among all banking categories except for medium banks which decreased to 54% from 56% in Figure 21: Liquid Assets to Deposit Liabilities 7.6 Earnings Analysis Gross income grew by 10% (was 17% in 2008) as per the table below: Table 15: Gross income increase. Year Gross Income % Increase ,940 10% ,147 17% ,714 44% ,207 Most banks reported increased gross income with TCB, Access and BOI coming at the top at 232%, 209% and 98% respectively. Interest income grew by 16% in 2009 while interest expense grew by 32%.. 27

35 APPENDICES: Summary of Ratios for the Banks 28

36 Tables in the Appendices Appendix Table 1: Total Assets Appendix Table 2: Loans, Advances and Overdrafts Appendix Table 3: Customers Deposits Appendix Table 4: Number of Staff Appendix Table 5: Loans & advances to Total Assets Appendix Table 6: Non Interest Expenses to Interest Income Appendix Table 7: ROAA Appendix Table 8: ROAE Appendix Table 9: Interest Margin to Average Earning Assets Appendix Table 10: Non Interest Expenses to Gross Income Appendix Table 11: Gross Loans to Deposits Appendix Table 12: Interest Income to Total income Appendix Table 13: Interest Margin Appendix Table 14: Earning Assets to Total Assets Appendix Table 15: Net Interest Margin Appendix Table 16: Total Expenses to Interest Income Appendix Table 17: Interest Margin to Gross Income Appendix Table 18: Operating Efficiency Appendix Table 19: Average Loan Portfolio Appendix Table 20: Loan Portfolio per Staff Appendix Table 21: Earnings Per Staff Appendix Table 22: Staff Income to Staff Portfolio Appendix Table 23: Portfolio Yield Appendix Table 24: Gross Yield on Earning Assets Appendix Table 25: Rates Paid on Funds Appendix Table 26: Portfolio Yield to Operating Efficiency Appendix Table 27: Yield to Rate on Funds Appendix Table 28: Government Securities as % of Earning Assets Appendix Table 29: Capital Adequacy Appendix Table 30: Non- Performing Loans to Gross Loans & Advances Appendix Table 31: Total Capital to RWAs Appendix Table 32: Core Capital to RWAs Appendix Table 33: Liquid Assets to Total Assets Appendix Table 34: Liquid Assets to Deposit Liabilities Appendix Table 35: Capital to Deposit Liabilities