30 African Banks: Credit impairment on the income statement. Which banks passed?

Dear Africa interested individuals:

                                                        Banks are typically highly sensitive to subtractive line items on their income statements.  Whatever loophole that can be applied to reduce the figures for these subtractive line items is always welcome.  A few of the key subtractive line items on the income statement that banks continually try to reduce as much as feasibly possible from an operational and financial performance standpoint are: interest expense, credit impairment loan loss and income tax expense.  When the quarter ends and the operational performance does not meet the management and board's expectation, the published financial performance becomes the final outlet to make an unpalatable situation palatable.  Perception has taken on a lot more importance today than reality; reality is what people say it is.  Freedom of expression has run amok.  

It is one thing to have a bad performance because one or more subtractive line items on the income statement turned out higher than envisaged or hoped for.  It is a totally different thing to actually humbly admit this reality (as expected) without distortions to a global audience through the published financials of the bank.  This is where mental work is sometimes done by banks (and other companies) to tell a better story when the story is just good or tell a bad story when the reality is worse.  The one line item I have always been fixated on (more than others) since time immemorial is credit impairment loan loss provision on the income statement.  It is a non-cash item (just like depreciation and amortization) that directly affects the income statement.  

Companies dislike it more than anything else when a non-cash item plays a significant role in reducing their profit.  Given that it is a non-cash item, there is some level of leeway to manipulate the figures to achieve certain agendas if so desired.  Add that to the fact that banks are created to lend money (the largest share of assets on a bank's balance sheet is typically loans) and no bank wants to fail at lending which is supposedly its core function even if its just for one fiscal year.  Credit impairment turns out to be a "judgment call" especially in the present world of International Financial Reporting Standards (IFRS)  and every bank's management and board has a decent amount of maneuver room to determine if a loan will be labeled impaired or performing.  In the world of IFRS, it is all about black and white; there is no grey.  The judge and jury are the same; the management and board of banks.  The published figures are the banks' take.  My take starts in the next paragraph.  

I accept that credit impairment is and should be a judgment call of each bank.  That judgment call should start and end with the gross loans impairment assessment that generates the net loans figure on the balance sheet.  The judgment call should not extend to the income statement.  "There has to be a method to the madness or madness becomes the method."  That same figure should now be charged against the income statement in full.  Every year a bank's management should look at the totality of its loan portfolio and determine how much of its loan book it deems to be impaired or non-performing.  All loan recoveries should be referenced directly or under "other operating income" on the income statement and not used to reduce the credit impairment charge in the notes that eventually shows up on the income statement.  Commendation goes from me to the National Bank of Malawi for doing exactly this.  Kindly note that not doing this did not lead to an automatic failure for a bank.  Find below the disclosure transgressions that all the banks that failed my assessment did at least one of.  

• Impairment charge on the income statement was too small relative to the judgment call increase in non-performing loans.  In simple terms, provision was inadequate.     
• Writing off of loans without categorically and specifically stating that the "loans written off have been fully provisioned for."  Writing off of loans that were not previously fully provisioned for actually increases the credit impairment charge on the income statement.  Writing off of loans that have been fully provisioned for in prior period(s) generates a reduction to the current-year credit impairment charge.  In my opinion, some banks wrote off loans that were not provisioned for fully or at all and treated them as if they were, thereby,  reducing the credit impairment charge on their income statement. 
• Collective impairment provision exceeding specific impairment provision with some other closely related anomalies.  
•  Vague breakdown of impairment allowance computation.  
• Reversals and/or write-offs that almost tally with the fresh impairment charge for the year thereby, neutralizing any expected increase in the impairment charge on the income statement.
• Dishonest actions surrounding interest income; one mind-boggling one was boosting of interest income utilizing impaired loans.  In simple terms, (I like keeping things simple) it is a non-cash flow boost to the cash item called interest income.  The bank is not receiving interest anymore on the loan disbursed, but, continues to book interest on its income statement.    
• Non-statement of interest income figure on the cash flow statement. 

I selected thirty (30) banks across Africa with the needed visibility to appeal to fund managers and the general audience.  Countries touched on my journey are: Kenya, Ghana, Nigeria, Egypt, Botswana, Namibia, Mauritius, South Africa and Malawi.  Let me start with the good news first.  Ten (10) banks only, proved to me beyond any reasonable doubt that the credit impairment charge on their most recent audited financials was operationally realistic and legitimate based on the published figures.  The published figures all related to the loan book spoke in one voice.  The banks are:

1. National Bank of Malawi
2. CAL Bank Ghana
3. CAPITEC Bank, South Africa
4. NBS Bank Malawi
5. First Rand Bank, South Africa     
6. FBN Holdings Nigeria (First Bank of Nigeria)
7. Diamond Bank Nigeria
8. FCMB Holdings Nigeria (First City Monument Bank) 
9. Standard Chartered Bank Ghana
10. Ecobank Nigeria    

The italicized banks impressed me more than the other four.  Five of the banks  had figures on their income statement that closely mirrored (in excess of 80%) the impairment charge used to generate net loans on their balance sheet.  SCB Ghana wrote off loans and admitted it had not provisioned for them earlier, thereby, further increasing the credit impairment charge on its income statement.    

Interesting findings post analyses: the oldest bank in Ghana (SCB) and Nigeria (First Bank) passed the test.  Who says wisdom cannot be attained in old age?  No Kenya or Egyptian bank selected passed.  The largest bank in Kenya, Egypt, Ghana, Mauritius, South Africa and Nigeria failed.  I guess when it comes to income statement credit impairment, size becomes a liability and no longer an asset.      

The banks that provided impairment charges on their income statements that I deemed "out of sorts" are:

1. National Bank of Egypt
2. State Bank of Mauritius
3. Commercial International Bank, Egypt
4. Diamond Trust Bank Kenya
5. Barclays Africa
6. Standard Bank Group
7. Access Bank Nigeria
8. Zenith Bank Nigeria
9. Mauritius Commercial Bank Group
10. Credit Agricole Egypt
11. Ghana Commercial Bank
12. Ecobank Ghana
13. Equity Bank Group Kenya
14. I & M Bank Holdings Kenya
15. Standard Chartered Bank Kenya
16. UBA Bank Nigeria
17. GT Bank Nigeria
18. Kenya Commercial Bank
19. FNB Botswana
20. FNB Namibia

 

 Phew! I am done with this one.  I am off to other things; when I get back someday, sometime, somewhere, it will be time to vent.  Vent?  You will understand better when the time comes.  Until then, remain blessed.  

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