Wisdom has it that losses lie where they fall. But for banks in particular, losses can fall anywhere in the economy but still end up lying on their bank balance sheets! The recent schemes by bankers to convert debt into equity or any such related debt-restructuring schemes at Lobels and Rio-Zim, among other companies, point to a worrying trend in the market for the banks. The period 2004 -2005 can be remembered by many bankers in Zimbabwe as a time when finding good sleep was a rare find because of the liquidity crunch that prevailed. Some six banks went under curatorship during the period and a score of others got relief from the Troubled Bank Fund. With the way big deals have been turning sour for some of the banks recently, one can only but feel pity for a sector that is still to recover fully from the massive capital erosion of the hyper-inflation period.
The idea that Zimbabwe needs progressive banks that are willing to lend and help the economy tick is hard to argue with. Dollarisation that was adopted in February 2009 has surely brought about all the celebrated economic stability in Zimbabwe. But it has equally brought about serious liquidity challenges that have resulted in companies scrambling to get credit. Therefore the banks have a very vital role to lend reasonably and ameliorate the risks in the economy. Unfortunately the process of lending in an economy fraught with a host of downside risks is not easy, and indeed the high loan to deposit ratios of most of the banks around 100% cannot escape the unfortunate plunge into some serious bad debt traps.
The biggest mistake by bankers has been to assume, very erroneously indeed, that we have blue chip companies that can get all the credit they require without providing collateral. That thought process has now come to haunt the banks. Most listed companies have always adorned the 'blue chip’ jacket status. It is very common among bankers to fall for the false perception that listed companies are stable, well run and have predictable earnings and hence can get unsecured credit. Just a look at the sheer number of companies that delist every year on the JSE in South Africa, and the countless numbers that file for bankruptcy in the US should on its own be a good indicator of the challenges companies face even when operating in stable environments.
The fact therefore that inflation has averaged below 4% since 2009 on the back of strong economic growth should not, at any time, be an indicator of stability and predictability on corporate balance sheets. If anything, the fact remains that more companies will file for bankruptcy in the first five years of dollarisation than in the 8 years to 2008 of hyper-inflation. And if the deputy sheriff and the messengers of court were business to be listed, indeed this would be a time when their earnings would always be exceeding market expectations and delivering excellent value.
The dollarisation of the economy has seen a number of ZSE listed companies hitting very hard times, with some companies such as RedStar delisting in a whirlwind of huge debts. Steelnet, a listed company, is now under judicial management and it is hard to believe that, notwithstanding the huge losses it posted in 2010, some lenders indeed saw the ‘blue chip’ light in Steelnet and extended loans to it. Although the losses have finally fallen on Steelnet, they are indeed lying on some banks’ balance sheets today in town. Many other listed companies have come up with synthetic re-capitalisation schemes designed to buy them another day in the market, but the fact that their operating models are no longer viable means that sooner or later they will meet their destiny and close shop.
This reality that some listed companies are just like tuckshops, and at times with worse fundamentals than growth-point butcheries has been very difficult to accept for the banks. And resultantly bankers have piled unsecured credit onto the balance sheets of such listed companies. More than 60% of listed companies in Zimbabwe are in dire debt situations. It is normal to find high gearing ratios for companies in Zimbabwe since they are re-building their balance sheets that have been eroded by inflation. However considering the shallow debt markets and intense global competition, it has been indeed very difficult for some of the companies to remain efficient and competitive.
At a time the US government has seen its credit ratings being downgraded, with the Euro-zone joining the sovereign debt crisis band members, the only logical thing for banks is to understand that things are changing always. What was fact yesterday can be a fallacy today and equally, what is fact today can be fallacy tomorrow. Therefore one of the safe ways to safeguard capital positions is never to lend unsecured, nomatter how "blue-chip" a company may sound and look. It would be a very wrong perception to conclude that there are no blue-chip companies listed on the ZSE. The fundamentals of some listed of companies such as Econet, SeedCo, Innscor etc are not in doubt.
But equally these same companies can never be expected to remain solid especially should their engage in massive debt-build up just because debt is favouring them in the market. And for lack of a credit reference bureau, most banks end up pilling debt on the same companies not knowing how much other banks would have plunged in. And as it is turning out, the big borrowers only disclose their true indebtedness to the market when they start defaulting, and only at such times do the banks begin to realise how deep and how many of them would have plunged. The situation can be likened to the joke that talks of 10 brothers and cousins all courting one woman. They are all invited to the woman's house one evening and each told to undress, be quiet and given a chair to sit on and wait patiently in a dark room for their time to meet the woman, only for the light to be switched on and all the 10 seeing glaring at each other and sharing the embarrassment.
The coming together of the banks in rescuing some of the big giants such as RioZim and Lobels is not at all a bad initiative. The economy needs big companies that can be able employ large numbers and contribute significantly to GDP, and indeed the profiles of some of these companies fit into this category. Equally, the banks need to do these restructuring schemes with the big companies that owe them money especially if they are not adequately secured since they are riding on tight capital positions that cannot take huge write-offs lest they cease to be compliant with the capital regulations. But there are indeed better ways in which banks can contribute to the economy without necessarily having made decisions that come back to haunt them.
Unfortunately most of the losses in the economy end up sitting on bank balance sheets, especially when they lend unsecured. Even with collateral, sometimes the markets just cease and still the losses end up sitting with the banks. The 2007-2008 global financial crisis even haunted the banks that had mortgage securities when the values of the same securities plunged. Even in Greece, the banks are no longer safe not because they lend to the private sectors, but because they are sitting on sovereign bonds that the Greek government may default on. Sounding like a zero-sum game, lending is indeed a difficult process and safeguarding capital can be the most difficult job for bankers especially in a market as tough as Zimbabwe’s.
In hindsight, its easy to see how the banks make bad decisions, and bankers always take the blame when they make wrong lending decisions. The blame will never be on the borrower because the banks are always assumed to make good judgement before they lend. An objective analysis however reveals that some of the big corporates in Zimbabwe are engaging in acts of reckless over-trading on their balance sheets by pilling up creditors and debts without proper disclosure. At a time the Zimbabwean economy is enjoying strong GDP growth and very stable inflation, it is easy for the banks to under-estimate the underlying risks in the economy. And surely the biggest embarrassment would be for any other bank in the market today to follow the footsteps of Renaissance Bank and collapse due to a culmination of bad judgments.
