The Development Bank of Ethiopia (DBE) has recorded the highest profit since its establishment by registering 399.9 million Br before taxes for the 2010/11 fiscal year, which is five times more than that of the previous year’s profits of 77.7 million Br.
The historical profit was announced by Esayas Bahire, president of DBE, during the bank’s annual meeting held at Haile Resort in Hawassa, located 275Km from the capital. The two day meeting was attended by employees and management from 32 regional branches, on Thursday, July 28, 2011.
The bank’s net profit stood at 198 million Br, beating its own target by 149pc, which was set at 133 million Br in its first year of implementing its strategic plan, which focuses on implementing the Growth and Transformation Plan (GTP).
Although service charges, commissions and other income, which are among the major sources of income, have increased by 37.8pc, from 572 million Br to 920.1 million Br, detailed analysis shows that that windfall gain earned from the devaluation of Birr against the basket of major currencies in September 2010 contributed for the success.
The devaluation, which contributed to around 341 million Br for operating income, was only 250,000 Br from the previous year. The currency devaluation of 20pc was the fourth since January 2009.
“Yes, we did make a gain from the devaluation of the Birr, like other commercial banks, we had ample amounts of foreign currencies during the devaluation from foreign trade,” said Esayas Bahire, president of DBE.
Of the total 1.6 billion Br collected in windfall taxes from all banks, DBE paid 125 million Br to the Ethiopian Revenues and Customs Authority (ERCA), according to the ERCA’s performance report for the fiscal year 2010/11.
However, excluding the gain on devaluation, the profit before tax would have been 58.9 million, which is 24pc lower than the previous year’s performance of 77.7 million.
The bank, which planned to make 730 million Br for the just ended fiscal year, has earned 920 million Br in income, which is greater than its preceding year’s performance of 572 million Br, demonstrating a 126pc increase in total income.
However, the average interest income from net loans and advances was reduced from 6.8pc to 4.6pc in 2010/11, while the net outstanding loans and advances of the bank stood at 9.8 billion Br in 2010/11, showing a 38pc increment from the previous fiscal year
Nevertheless, Esayas argues that the reduction of interest earnings is due to the new directive issued by the National of Ethiopia (NBE) six months ago. The directive instructs banks not to consider income from a loan whose credit quality has deteriorated, or on which collection of interest is in question and designate it to nonaccrual status.
Just after implementing the directive, the bank has recorded 31.5 million Br losses in the third quarter, while showing a net profit of 131.6 million Br over the past nine months, according to the report.
The bank underperformed in meeting its target of generating 566.5 million Br from interest loans by 20pc, with 452 million Br in revenues from interests.
Commercial agriculture, agro processing and manufacturing sectors are among the sectors that are identified by the bank as priority sectors. The service sector is regarded as a non priority sector that the bank is discouraging financing to unless it involves services crucial to the priority sector. The bank has started to disburse loans to priority sectors only, starting from 2008.
In this fiscal year, more loans for projects were approved than had been planned by the bank, which was established in 1909 as a society for the promotion of agriculture and trade, and re-established in 2005.
DBE had planned to approve 5.1 billion Br in the just ended fiscal year, but approved 5.5 billion Br in loans for 524 projects in priority sectors, showing a 108pc increment from the previous year, which registered 3.6 billion Br.
Due to high loan approval, the bank has exceeded its plan of disbursing 3.2 billion Br for this fiscal year. It had made a total disbursement of 3.8 billion Br, which has shown eight per cent increment from 2.9 billion Br. Of the 3.8 billion Br, 78pc, or 2.9 billion Br, was approved for the industrial sector, while 571.4 million Br and 265 million Br went for the agricultural and service sectors, respectively.
The disbursement is made for huge projects which demand high capital, mainly for sugarcane production and cement projects.
Although, the bank is financing 98pc (9.6 billion Br) of its net loans and advances through borrowing, mainly from local sources, which stood at 87.6pc (8.6 billion Br) in 2010/11, the share of deposit as a percentage of loans is only 0.07pc, which is 670.5 million Br.
Due to the increased local borrowing, which exhibited an average increment of 3.4pc from 2.7pc last year, the interest paid for loans has doubled from 150.2 million to 332.2 million Br.
In addition to increments in the cost of borrowing, the excess cash borrowing of the bank has forced the DBE to invest 1.6 billion Br on treasury bills, which is viewed as an unwise investment decision, according to Abdulmena Mohammed, accounts manager for the Portobello Group Ltd, a London based holding company with subsidiaries in property investments and development projects.
Although the bill is tax free, it has only a one per cent investment yield while DBE is borrowing with a 3.4pc average interest rate on a yearly basis from local sources.
“It should have been avoided by effective cash flow planning,” argued Abdulmena.
DBE has earned an interest margin of 1.1pc, which is less than the private banks, which stood at 7.5pc in June, 2010.
The bank should diversify its financing sources as it now mainly relies on CBE, and expanding its deposit base is equally important, Abdulmena suggested.
Although loans and advances have shown increment, the bank has managed to reduce non performing loans (NPLs) to 11.7pc (1.4 billion Br) from 19.5pc (1.7 billion Br) compared to the previous year. However, the current rate is below the bank’s plan set at 9.4pc, which is short by 20pc and below the African Development Financing Institution (ADFI), of which DBE is a member.
However, detailed analyses reveal that an additional provision of 77.1 million Br was held in 2010/11. Yet, the provision of 77.1 million Br is much better than the previous year’s amount of 250.2 million Br.
Compared to private banks’ provision of bad debts, which were 35.3pc of their interest income in June 2010, DBE’s figure for the just ended fiscal year is 17pc, and was 51.9pc the year before.
The bank has established the Project Rehabilitation and Loan Recovery Process (PRLRP) department to handle loans that get to NPL status. Loans that reached NPL status from all branches are transferred from credit processing to the department and are treated based on the type and problem of project to recover from their status.
The department has the right to change the management of the company if the problem is identified to be management, and it can also inject capital if the problem is financial, according to the bank’s policy.
In this fiscal year, the PRLR has transferred six projects which were in NPL with 270 million Br in outstanding balances to credit process, while a project with a total outstanding loan balance of eight million Birr was transferred to PRLR, according to the report.
The contribution of the total asset to the bank’s profit increased from the 2009/10 fiscal year from 0.81pc to 2.9pc during 2010/11, however, had it not been for the devaluation the contribution would have amounted to 0.43pc.
The capital and reserves to total assets ratio of DBE is 15.9pc, which is still better than CBE’s and the average of private banks, which were 8.5pc and 12.6pc, respectively, in 2010.