After a decade of hyper inflation and the death of a currency in Zimbabwe, many had waited for the signs of the turnaround to pounce on discounted assets that would instantly create value for the holders. With the Government of National Unity, some international investors are taking keen interest on Zimbabwe, with many positioning to grab gems still swathed in the rubbles of the decade-long economic collapse. Few however will be lucky to find them to create instant wealth. The stock market could have been the easiest route.
The greatest challenge however is the valuation mechanism. What is the fair value of Tedco today for example? On 03 January 1995, its market cap was US$10 million and now it’s trading steadily around US$2.4 million. PGI, valued at US$58 million then, has collapsed to US$13 million currently. It’s more or less the same scenario globally, with P/E ratios at their worst in three decades. Global stock markets have collapsed, with banking and oil stocks having been severely battered by the global recession, and picking value in Zimbabwe today is not going to be easy guesswork. P/E ratios, which ceased to make sense in 2001 in Zimbabwe, will not be making sense either today because there are no earnings to talk about, and they might be none to talk about the next 18 months. Today the Zimbabwe stock exchange is trading in US$ yet the last reported earnings are in ZW$ that died a long time ago and have since been laid to rest in peace.
Which sectors are likely to lead in value creation for investors in Zimbabwe? Banking comes into mind first because of the current global upheaval. Let’s evaluate the banking sector. History in the last two years showed that, on the back of sectoral indexation investment strategy on the Zimbabwe Stock Exchange, the banking sector created good value for investors ahead of the manufacturing, mining, retail index etc. How much value can one create by snapping the seemingly cheap banking stocks on the Zimbabwe Stock Exchange today? Is it hilarious or sad that FBC Holdings has a market capitalization of only about $3.5 million? Mind you this establishment has a building society and commercial bank. To get a license for these two entities from the RBZ one needs to demonstrate they have no less than $22.5 million. One may forgive NMB for its going value at about $4.2 million since its likely target market has been decimated by inflation.
The middle and lower upper class levels don’t exist in numbers that warrant a bank to get a license for those, at least for now. ZB, for all its name, wide branch network and track record, is trading at around $7.4 million. Maybe name and track record matter no more for investors, especially with the collapse of Lehman Brothers in fair weather when it had survived the ghastly winds of the Great Depression and World War 2. CBZ and Barclays are no different from the rest. Does it explain why ABC has been trading at about 35% of its value on the Botswana Stock Exchange? Are these trading figures closer to the truth for now or it’s a case of the stock market failing to reflect fundamentals?
The banking sector in Zimbabwe is arguably at its weakest point since its establishment from the earnings perspective. The balance sheets have little value to generate meaningful profits for stockholders. The worry of liquidity risk that kept banks closer to poor-yielding TBs more than any other asset the past 3 years has wiped balance sheet values. Now the local currency is dead, and with that death, the little amounts of TBs on bank balance sheets, although now very insignificant, have become valueless. Stock market is usually for long-term value creation, so the challenges facing banking stocks today may not matter for investors.
So how about the recovery side going forward? Interest income is going to be very thin on the next two or so years as the banks have little or no deposits to lend simply because the banking public has no foreign currency to leave in the banks. With the majority of the working class earning below $150 per month, what hope is there that soon the deposits will grow to meaningful levels, even if the reserve ratio at the RBZ is going to be put at 0%? Slim. On the other side, the few banks that will access commercial lines of credit to stimulate their lending activities will assume greater risk. The margins are too tight. The real cost of capital in Africa is still very high notwithstanding the LIBOR at historic lows. The base rate for dollar transactions is around 8% in Africa today, and with the higher country risk tagged to Zimbabwe, the total cost could be anything around 11%. The few banks that will clinch lines of credit will find loading a meaningful spread difficult.
Non-performing loans, not known to Zimbabwean banks in the last 5 years, all of a sudden will become a real risk to manage when lending starts generally to pick up. Zimbabwean bankers have for years now seen far less than 1% of their loan books going bad, all benefiting from inflation that made borrowers winners always. The real cost of borrowing improved from minus 87% to minus 99% between 2004 and 2008 respectively, implying borrowing the equivalent of US$1 in 2008 saw one paying back around $0.01 at the end of the year, cost plus interest. That is cheap money in all standards. No one could default, and the non-performing loans were almost non-existent on bank loan books. With the dollarized economy, the reality of bad loans will haunt banks, and more prudence will be required. Regionally, bad loans are quite a worrying aspect. In Uganda the banking sector saw non-performing loans at 9.3% in 2008, whilst in Tanzania they stood at a modest 6.7%. SA banks, though still on the low side, are seeing a deteriorating profile especially from the home loans segment and consumer loans. ABSA saw more than 100% increase in its impairment charge to US$580 million, whilst First Rand had non-performing loans standing around US$1.9 billion, about 4.2% of its loan book in December 2008. Zambian banks are likely to suffer the same fate as the revision of growth prospects for 2009 to around 5% due to contraction in copper mining activities, slowdown in tourism and manufacturing will most likely expose the banking sector this year.
What about other the future of other income? The emotions characterizing the biting economic hardships will keep ledger fees at their most minimum. When no meaningful lending is happening because the deposit base is thin, the arrangement fees and commission income will not be significant enough to change the earnings fortunes of the sector. The perennial running battles between the banks and RBZ regarding the former straying into the stock market could be over, and the banks are less likely to report any gains on their equity portfolios. Besides, many by now would have liquidated these to provide the liquidity needed to kick-start lending, reviving the corporate banking divisions that had virtually closed.
What then about banking stocks? Buy, hold or sell? Banking stocks are tricky. Banks have little, if no residual values at all. One cannot put value from that perspective. The earnings perspective will give one better chance to evaluate the potential of the upside. I have faith in the banking stocks. As long as their values are trading at these levels, there is huge upside potential that unfortunately will take time to realize. It’s beyond doubt that the stocks are trading at levels that have a potential for creating a huge upside when liquidity begins to flow more freely in the global markets. Foreign capital is what will most likely generate significant buying activity on the ZSE more than domestic inflows. I would give the banking stocks seven out of ten as potential ‘pick’. Traditional-minded banking models are likely to start the value creation cycle when it eventually starts. ZB, Barclays, and CBZH have long-term potential based on their wide retail networks. The few banks that rely on wholesale funding will find the going tougher. But don’t be fooled by the results coming through for December 2008 in making buying decisions into the future. These results have blatant distortions from the ZW$ activities that characterized the previous trading period. Some banks will command huge market shares on the back of probably ASPEF or BACOSSI funds that one or two clients of theirs accessed towards the reporting period.
These have since evaporated and some of these banks could be sobering to the reality of elusive real deposits that simply aren’t there. As the economy begins to take shape, more cheap deposits will accrue and create a base upon which to lend and create value for the shareholders. But that is about 2 years from now assuming the momentum of recovery continues. Bilateral and multilateral financial arrangements to bail the economy, because they are usually at concessionary rates, will bring the much needed boost in banking earnings quicker than via organic growth.
For banks stockholders, it’s highly likely that the banks will not declare any dividend the next three years, so stay put for capital appreciation. On the other hand, banking shareholders should expect always to be following their rights in injecting more capital to keep their banking companies afloat. If anything, the economy needs a lot of money to kick start and being a shareholder in a bank means you are prepared to continue pumping in money into your company to assist the economy. Every company is looking at accessing working capital, and the banks are not meeting the challenge. Loans and lines of credit will hasten the recovery process, but the bigger bargain would come from the government getting debt cancellation and substantial donor funds. HonorableTendai Biti should sharpen his tongue and bargain for debt cancellation and push for more banks and micro-finance companies to operate in the economy.
As I have always preached, licensing more banks that could be deep pocketed will assist the economy towards faster recovery, and the multiplier effect will pull up the rest of the banking sector. Next week let’s cross over to the mining sector and see if there is any good news for investors. Remember Hwange, for all its massive infrastructure, huge coal reserves and the surging sweet demand for electricity as the region gets darker by the night, is only trading around $25 million market cap.
