Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors. With provisional 2019-20 results for Ethiopia’s banks recently becoming available, this note reviews the sector’s latest performance, notable trends, and near-term outlook. We find that the banking sector has so far come out of the COVID pandemic in relatively good shape (as has the broader macroeconomy) and that private banks have done particularly well in making market share gains vis a vis the dominant state bank. Looking ahead, however, banks will be facing major policy shifts in the way that Government finances its deficit, sets monetary policy, and determines the exchange rate—while also having to cope with a changing financial sector landscape that will bring many new entrants, additional service offerings, and a wider range of funding sources. These extensive macro- financial reforms should not pose a risk to the banking sector’s historically strong growth record, in our view, but they do imply an increasingly competitive operating environment, a moderation in average shareholder returns, and a greater differentiation in performance across banks. § Recent performance—positive results despite COVID: Ethiopia’s private banks finished the 2019-20 fiscal year on a sound footing, with deposits up 25 percent, loans up 34 percent, and profits up 21 percent. Average returns to shareholders (EPS) were near 32 percent, not much different from the norms of recent years. § Market dynamics: Private banks have steadily increased their market shares in branch networks, deposits, loans, and profits. For the just-ended fiscal year, the total new deposits mobilized by private banks (Birr 89bn) exceeded that of CBE (Birr 54bn), while private banks’ collective profits (Birr 17bn) have now surpassed—for the first time—that of the state bank (Birr 14bn). § Outlook—major shifts in the banking landscape: The sector is set to face major policy shifts as the Government modernizes its framework for deficit financing, monetary policy setting, and exchange rate determination. Other reforms will bring many more competitors (up to 20 new banks, MFI-turned-banks, leasing companies, fin-techs, specialized service providers, foreign financiers), broaden funding sources (via local bonds and external borrowing), and permit new services (such as capital market offerings). Taken together, these changes in the macro-financial environment will help propel continued banking sector growth but within a much more competitive environment for the established players. Data Appendix: Revisiting our 2019 Banking Sector Report, we update by one year our compilation of banking statistics and provide a 25-page data appendix covering key sector trends as well as five years of bank-by-bank performance metrics (up to FY 2018-19) for all of Ethiopia’s private banks. Ethiopia’s Banking Sector RESEARCH & ANALYTICS Earnings Per Share, Sector Average, % 31.5% 33.7% 31.2% 28.4% 29.5% 25% 27% 29% 31% 33% 35% FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17 FY 2015-16 Private Banks' Profit Market Share, % 54.8% 47.1% 49.1% 42.5% 29.7% 25% 35% 45% 55% FY 2019-20 FY 2018-19 FY 2017-18 FY 2016-17 FY 2015-16
41
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Ethiopia’s Banking Sector · total new deposits mobilized by private banks (Birr 89bn) exceeded that of CBE (Birr 54bn), while private banks’ collective profits (Birr 17bn) have
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Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
With provisional 2019-20 results for Ethiopia’s banks recently becoming available, this note reviews the sector’s latest performance, notable trends, and near-term outlook. We find that the banking sector has so far come out of the COVID pandemic in relatively good shape (as has the broader macroeconomy) and that private banks have done particularly well in making market share gains vis a vis the dominant state bank. Looking ahead, however, banks will be facing major policy shifts in the way that Government finances its deficit, sets monetary policy, and determines the exchange rate—while also having to cope with a changing financial sector landscape that will bring many new entrants, additional service offerings, and a wider range of funding sources. These extensive macro-financial reforms should not pose a risk to the banking sector’s historically strong growth record, in our view, but they do imply an increasingly competitive operating environment, a moderation in average shareholder returns, and a greater differentiation in performance across banks. § Recent performance—positive results despite COVID: Ethiopia’s private banks
finished the 2019-20 fiscal year on a sound footing, with deposits up 25 percent, loans up 34 percent, and profits up 21 percent. Average returns to shareholders (EPS) were near 32 percent, not much different from the norms of recent years.
§ Market dynamics: Private banks have steadily increased their market shares in
branch networks, deposits, loans, and profits. For the just-ended fiscal year, the total new deposits mobilized by private banks (Birr 89bn) exceeded that of CBE (Birr 54bn), while private banks’ collective profits (Birr 17bn) have now surpassed—for the first time—that of the state bank (Birr 14bn).
§ Outlook—major shifts in the banking landscape: The sector is set to face major
policy shifts as the Government modernizes its framework for deficit financing, monetary policy setting, and exchange rate determination. Other reforms will bring many more competitors (up to 20 new banks, MFI-turned-banks, leasing companies, fin-techs, specialized service providers, foreign financiers), broaden funding sources (via local bonds and external borrowing), and permit new services (such as capital market offerings). Taken together, these changes in the macro-financial environment will help propel continued banking sector growth but within a much more competitive environment for the established players.
Data Appendix: Revisiting our 2019 Banking Sector Report, we update by one year our compilation of banking statistics and provide a 25-page data appendix covering key sector trends as well as five years of bank-by-bank performance metrics (up to FY 2018-19) for all of Ethiopia’s private banks.
Ethiopia’s Banking Sector
RESEARCH & ANALYTICS
Earnings Per Share, Sector Average, %
31.5%
33.7%
31.2%
28.4%
29.5%
25% 27% 29% 31% 33% 35%
FY 2019-20
FY 2018-19
FY 2017-18
FY 2016-17
FY 2015-16
Private Banks' Profit Market Share, %
54.8%
47.1%
49.1%
42.5%
29.7%
25% 35% 45% 55%
FY 2019-20
FY 2018-19
FY 2017-18
FY 2016-17
FY 2015-16
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
2
Recent Performance of Private Banks: Deposits, loans, capital, and branch networks § Private banks recorded a strong performance last year across key metrics—deposits, loans, capital, and branches. § Loans rose by nearly Birr 100bn for the year, funded by Birr 87bn in new deposits and Birr 8bn in extra capital. § Branch networks were also significantly expanded, and the total number of private bank branches is now nearly
triple that of the CBE (4,361 private bank branches vs 1,604 CBE branches).
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
3
Recent Performance: Profits, Returns of Assets, and Return on Equity § Despite the COVID pandemic, pre-tax profits rose from 14bn to 17bn, though the latter are still provisional figures
for June 2020. Taking into account effective tax rates for the sector, we estimate after-tax profits will be Birr 13.1bn, implying close to Birr 4bn in tax payments by private banks for the year.
§ Expressed relative to year-average paid-up capital, the profit figures translate into an average Earnings per share (EPS) of 31.5 percent in FY 2019-20, close to the average returns received by shareholders over the last five years.
§ Profits were equal to 2.5 percent of average assets (ROA) and also equal to 29 percent of total capital (ROE).
Fig 7: Return on Average Assets at Private Banks (RoAA)
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
4
Recent Performance: Underlying sources of strong performance § Last year’s strong results were driven by a greater deployment of mobilized deposits (as loan/deposit ratios rose
sharply), still-sizeable lending spreads (near 7 percent), and on-going declines in banks’ cost-to-income ratios. § Given Ethiopia’s July-June fiscal year, COVID-related shocks were concentrated only in the last quarter, thus
minimizing adverse impacts for the banking sector (as for the broader macroeconomy) over the full fiscal year. § Regulatory forbearance by the central bank—in allowing generous rescheduling terms to be granted to COVID-
affected companies/loans—also helped the banking sector overcome the impacts of the pandemic, though most private banks started from relatively low NPL ratios and loan-loss provisions even before the pandemic.
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
5
Recent Performance: Underlying sources of strong performance (continued) § Seen from a longer-term perspective, and applying a Dupont analysis to bank’s underlying earnings, the strongest
contributors to the high returns of Ethiopian banks continue to be their sizeable net interest margins, low overhead costs, and low loan-loss provisions.
§ For about a quarter of all banks, high non-interest income (reflecting strong fx trading businesses and high fx fees) also contributed materially to the high EPS results.
§ Many of the above factors are, in turn, reflective of long-standing structural features of the banking sector: excess demand for both credit and foreign exchange gives banks relatively strong pricing power in both areas, the simplified nature of most bank service offerings allows for low overhead costs (relative to revenue or assets), and a reliance on collateral-based lending practices makes possible a relatively low cost of risk.
Fig 13: Dupont Analysis for Private Banking Sector
Dupont Decomposition 2013 2014 2015 2016 2017 2018 2019Interest income to Assets 5.8% 6.2% 6.7% 7.3% 7.1% 8.4% 8.0%Interest cost to Assets -2.3% -2.3% -2.5% -4.9% -2.9% -3.5% 3.3%Net interest income to Assets 3.5% 3.9% 4.1% 3.2% 4.3% 4.9% 4.7%Other income to Assets 4.8% 4.9% 4.7% 4.4% 4.3% 3.7% 2.6%Total income to Assets 8.3% 8.8% 8.8% 7.5% 8.6% 8.6% 7.3%
Operational costs to Assets -3.5% -4.3% -4.5% -4.5% -4.9% -4.7% -4.2%Operational profit to Assets 4.2% 4.5% 4.3% 4.4% 3.7% 3.8% 3.1%Provisions to Assets -0.5% -0.3% -0.2% -0.4% -0.3% -0.2% -0.2%
Profits-Before-Tax to Assets 3.8% 4.2% 4.1% 4.0% 3.4% 3.6% 3.1%Taxes to Assets -1.1% -0.9% -1.0% -0.9% -0.8% -0.9% -0.7%Profits-After-Tax to Assets (ROAA) 3.2% 3.3% 3.1% 1.7% 2.6% 2.8% 2.9%Leverage ratio (Assets to total equity) 6.8 6.4 6.5 6.8 7.2 7.4 7.8Profits to Equity (ROAE) 21.6% 20.5% 19.7% 20.3% 17.8% 20.2% 20.4%
Total Equity to Paid-up Equity 1.7 1.5 1.6 1.5 1.6 1.5 1.7 Earnings Per Birr 1,000 Share 36.0% 31.1% 30.8% 29.5% 28.4% 31.2% 33.7%
Source: Banks' Annual Reports
Fig 14: Dupont analysis: Bank by bank analysis for FY 2018-19 data
Total capital to paid-up capital ratio 2.5 2.6 1.7 1.7 1.7 1.6 1.6 1.5 1.7 1.6 1.4 1.6 1.5 1.3 1.2 1.3 Earnings per share, actual 63.2% 40.8% 28.9% 25.6% 30.8% 39.2% 36.4% 38.0% 39.8% 37.4% 28.7% 24.7% 34.3% 20.7% 18.5% 32.3%
Source: Cepheus research based on banks' Annual Reports. Shaded cells show bank with best performance for given line-item
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
6
Banking Sector: Banking Sector Market shares § Private banks continue to make strong gains in capturing market share, and now make up 43 percent of sector
deposits and 55 percent of sector profits. § Looking just at new deposits, the amount of deposits mobilized by private banks last year (Birr 89bn) substantially
exceeded that mobilized by CBE (54bn); this partly reflects the fast-expanding branch network of private banks, who opened 641 branches during the year, or four times the 160 new branches added by CBE.
§ In a historic first, private banks’ collective profits now exceed that of the state bank, reaching Birr 17bn ($538mn) in FY 2019-20 or 55 percent of Ethiopia’s Birr 31bn ($980mn) banking profit pool.
Fig 15: Deposit Levels in 2019-20 at Banks (Birr bns)
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
7
Banking Sector: Banking Sector Market shares (continued) § Seen over a longer time frame, CBE has seen a steady decline in its market share in deposits and loans (both down
by about 10 percentage points) as well as in profits (down 25 percentage points) over the past five years. § Despite the above trends, CBE is still the single largest bank in the sector, with deposits and profits that are 8.5x
and 3.8x respectively that of the largest private bank. § Moreover, in certain areas, CBE remains the market leader even when compared to all private banks as a group:
for example, on foreign exchange intermediation, fx inflows captured by CBE (via remittances and exports) likely exceed the $4.5bn intermediated by all private banks in FY 2018-19, while the bank’s CBE Birr mobile wallet platform (with 2.1mn users) is substantially larger than the offerings of all other banks in the market.
Fig 19: CBE Market Share (%)
Source: CBE Survey and Annual Reports
71.9%70.5% 70.9%
68.7%
65.7%
61.2% 60.8%
54.0%56.0%
58.0%
60.0%
62.0%
64.0%
66.0%
68.0%
70.0%
72.0%74.0%
2014 2015 2016 2017 2018 2019 2020
Loans
67.6% 67.3%
61.2%
64.4%
61.9%60.1%
57.1%
50.0%52.0%
54.0%
56.0%58.0%
60.0%62.0%
64.0%
66.0%68.0%
70.0%
2014 2015 2016 2017 2018 2019 2020
Deposits
67.2% 70.0% 70.3%65.1%
49.6%52.9%
45.2%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
2014 2015 2016 2017 2018 2019 2020
Profit
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
8
Banking Sector Outlook:—Macro Policy Reforms § Macro policy reforms will bring major changes—as summarized below—to the banking sector as Government
modernizes its framework for deficit financing, monetary policy setting, and exchange rate determination.
Area Issue RemarksThe launch of Treasury Bill auctions in Dec 2019 has provided a new framework for private banks to lend to Govt via 28-day and 90-day Bills that help cover the annual budget deficit. Gross T-Bills of 18bn were issued to banks in FY 2019-20, and interest rates have risen to a range of 7-9 percent, sufficient to at least cover banks' cost of funds.
Looking ahead, private banks will now likely become more material financing providers to the Government based on (and assuming) increasingly market-determined interest rates at the Treasury Bill auctions. Previously, mandatory funding requirements imposed on banks required them to purchase NBE Bills equal to 27% of their new loans and a fixed (5%) interest rate. T-Bill allocations were roughly 2 percent of private banks' assets as of June 2020 (Birr 12bn net T-bills vs Birr 565bn in assets), though NBE Bills were near 20 percent of bank assets in June 2019, suggesting much more additional room for banks to assume additional T-Bill purchases in the coming years.The T-Bill Market is expected to remain closed to foreign investors, thus preventing foreign portfolio inflows in this area, consistent with Ethiopia's still-closed capital account and fx constraints. Returns on holdings of T-bills expected to be more reflective of market rates (or at least enough to cover funding costs)Ability to sell T-Bill holdings, rather than holding them to maturity, will provide substantial liquidiy buffers to banks as they can liquidate their T-Bill holdings for cash in times of acute liquidity stressHigher interest rate in T-Bill market could potentially impose tighter discipline on size of Govt domestic borrowingMinimum purchase mandates not yet in place, but may be imposed if deficit financing needs become substantialDue to moral suasion or via other pressures, as is sometimes common by many central banks, interest rates may not rise to fully market levels, implying lower earnings from holding T-Bills versus allocating funds to private sector borrowersCrowding out: Credit to the private sector will be reduced by amount of T-Bill financingT-Bill market already started in December 2019, but a secondary market in T-Bills is still not established and is expected to start in late 2020, allowing banks to exchange Bills for cash at times of liquidity stressAdditional instruments such as Treasury Bonds (with a more than 1-year maturity) may start in 2021 and beyond as declining inflation allows for longer-term maturities to be issued.More conventional monetary policy tools and instruments expected in the near future--including most likely a reference central bank policy rate that sets the floor (and provides signalling) for interest rates and the practice of buying/selling Treasury Bills and Bonds by the NBE to inject/withdraw liquidity from the banking systemNBE can also use other potential tools--including its own Bills for liquidity management purposes and RR changes Banks will need more active liquidity management operations/desks to anticipate impacts of changing interest rates, inflation rates, and monetary policy decisions; improved forecasting capabilities in this area will be important as well.Banks will have more tools at their disposal to manage unexpected liquidity conditionsBanks will have a common benchmark at which to set minimum rates for their lowest risk or prime customers
Central bank's interest rate floor, if set to maintain positive real rates, may imply high lending rates than those currently offered for prime customers and could consequently limit loan demand (if inflation stays at elevated levels)The full flexibility to set lending rates that banks currently have may be constrained somewhat if/when the NBE policy rate becomes the de facto minimum lending ratePotentially in the next fiscal year, i.e., FY 2021-22Implementation is unlikely to start until inflation is firmly under control and is at or near single-digit levelsA market-determined exchange rate would imply banks having the flexibility to adjust their buying/selling rates to clients depending on supply/demand conditions that they see in the market. At present, all banks receive daily buying/selling rates from the central bank each morning and all banks follow that rate for the day's fx transactionsThe scope for exchange rate changes may still be kept within prudential limits, including for example maximum daily upward/downward percent movements that are common in some emerging marketsThe central bank may also, of course, occasionally intervene if it feels the exchange rate is depreciating/appreciating at an unduly rapid rate by selling/buying dollars to the market; banks would need to be the counterparties to such fx interventions by the central bankBanks could secure more fx by adjusting their rates to more depreciated offers if there are willing buyers at that (more depreciated) rateExchange rates will not necessarily be identical at all banks (as is the case at present) and customers will have greater opportunities to shop around for better rates (as they now do for lending rates); banks will also have room to differentiate (within certain regulatory limits) among their customersForeign exchange portfolio management will be more challenging as fx valuation changes (which thus far always translated into Birr gains when holding USD assets) can now bring both Birr gains (if/when Birr depreciates) as well as Birr losses (if/when Birr appreciates). Internal finance and treasury management staffing and functions will require considerable training and upgradingHigh fees charged for Letters of Credit should fall significantly and be subject to competition, as the greater fx availability implied by flexible exchange rates would limit banks' pricing power on charges for L/Cs and P/Os.Unlikely this year, possible in FY 2021-22, and more certain for FY 2022-23
Source: Cepheus Research compilation
MONETARY POLICY
Implications for Bank Operations
Positive opportunities for BanksPotential threats to Banks
Expected timing
GOVERNMENT DEFICIT FINANCING
Implications for Banking Operations
Positive opportunities for banks & wider economyPotential threats to banks & wider economyExpected timing
EXCHANGE RATE DETERMINATION
Implications for Bank Operations
Positive opportunities for Banks
Potential threats to Banks
Expected timing
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
9
Banking Sector Outlook:—Changing Financial Sector Landscape § Besides wide-ranging macro reforms, broader financial sector liberalization will also alter the banking landscape
by bringing many new entrants, additional service offerings, and a wider range of funding sources.
Close to 20 new banks are currently under formation, potentially bringing Birr 20-40bn in paid-up capital, and likely raising the number of banks in Ethiopia towards levels seen in Kenya (44 banks) and Egypt (40 banks).Prospective entrants include: Zemzem Bank, Hijra Bank, ZAD Bank, Goh Betoch Bank, Amhara Bank, Gadaa Bank, Sheger Bank, Selam Bank, Jano Bank, Ahadu Bank, Afro Bank, Dallol Bank, Kush Bank, Ethiopian Diaspora Bank
Foreign banks are still unlikely to be permitted to enter in the next couple years but could be possible thereafter. Prospective players that might enter--via acquisitions or greenfield operations--include banks in Kenya (Equity, KCB, CBO), South Africa (Standard Bank), Egypt, Morocco, plus regional players such as EcobankNon-bank funding from a prospective stock market will represent an alternative option for Ethiopia's largest firmsA few dozen firms (with revenue of above say Birr 500mn) could choose stock market funding rather than bank loansHowever, stock market launch and activity is unlikely to be in fully in place till 2022 or beyondAround five quasi-public and one private/foreign leasing company (Ethio-Leasing) are currently in placeLow entry requirements (Birr 400mn capital) and openness to foreign investors should attract additional entrantsMore than 35 MFIs currently in place and the largest of these are expected to potentially convert to banksConversion would allow new banks to engage in fx services and take advantage of higher lending limitsLarge SACCOs may also convert into banks, potentially in specialized areas such as agricultureLoosening of regulations is allowing for start-ups in mobile wallet, e-payments, and e-commerce spaceFin-techs could compete with banks' existing mobile money offerings and/or partner in particular sets of servicesScaling up has posed a challenge in this sector, however, and ability to do so has yet to be proven New banks could focus on particular market niches: interest-free banking, regional markets, sector focus (mortgages, agriculture), or types of services (cash-flow based lending, start-up financing, equity investment)Revamped and strengthened DBE is expected to also pose additional competition to commercial banksProviders of specialized services may also join sector, i.e. ATM/POS operators, cash pick-up/delivery providersDevelopment Finance Institutions: IFC, CDC, AfDB, US DFC, and others expected to boosting debt/equity offeringsEXIM Banks with private sector lending windows (in China, India, Turkey, UK, EU, etc) likely to remain in marketFDI companies already in Ethiopia also deploying surplus funds to re-invest in sectors beyond their core businessPrivate Equity and Venture Capital firms will also increasingly provide long-term equity funding alternativesThe start of stock markets and bond markets expected to bring associated business opportunities for banksBanks, advisory firms, and brokerage service providers will be a core part of this new ecosystemAdvisory services in bond/stock issuance and in mergers/acquisitions expected to be potential bank offeringsNon-branch based banking channels likely to become part of market for payments, saving, borrowing, and investing Few large mobile-based service providers (banks, non-banks or joint ventures) likely to become dominant payment platforms once widespread public acceptance/usage takes offConsumer lending already beginning to become a standard service offering at most banksNational ID, being pushed by most banks, could substantially increase consumer lending activity in the coming yearsCredit card services could also enter the market, supported by National ID, credit registries, and rising middle classNon-collateral based financing: Using projected cash-flows; credit-scoring based methods, etc is a growing prospectPotential growth in micro-lending using digital channels is also a strong prospect, per many regional examplarsSME lending could also become a material share of the market through existing bank channels or specialized outfitsLarge corporates likely to be able to issue bonds directly to the public (for lower rates) rather than using bank loansBanks may also consider bond issues (regulations permitting) as an additional funding source beyond just deposits. Fx-generating local companies will increasingly have the option of seeking foreign loans for long-term financingPer recently issued Directives, banks will also be able to contract foreign loans to on-lend to their corporate clients
Source: Cepheus Research compilation based on NBE announcements, Directives, press reports, and industry sources
External
borrowing
NEW FUNDING
SOURCES
Local bond
issuance
NEW ENTRANTS &
COMPETITORS
New Banks
Stock market
Leasing
Companies
MFIs and
SACCOs
Fin-techs
Specialized
service
providers
Foreign
financiers
NEW SERVICE
OFFERINGS
Capital
market
services
Digital
banking
Consumer
lending
Other
unconvention-
al services
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
10
Banking Sector Outlook:—Competitive Environment § In terms of competitiveness, most indicators show there has been active competition among banks for most of the
past decade, though there are some signs pointing to a pause during the last three years. § The market shares held by the largest banks have fallen from a range of 75-85 percent ten years ago to around 50-
55 percent in recent years, suggesting improving competitiveness, particularly for newer/younger entrants. § Further indications of a competitive environment are seen from the fact that several newer banks have managed
to match or exceed the deposits of older banks, have crossed certain critical thresholds (such as profits of Birr 1bn), and have reached the ranks of the highest yielding banks (in terms of shareholder returns) alongside many of the older, established private banks.
Fig 22A: Concentration indicators over the past decade at private banks: Market Share of Top 5 Banks
Source: Banks Survey data and NBE
80.1
62.6
56.856.5
57.356.8 55.8
54.0
82.5
64.2
60.1 57.4
55.753.4 52.6
52.7
74.1
58.5
55.9 55.1
53.1 53.2 51.6 50.248.0
53.0
58.0
63.0
68.0
73.0
78.0
83.0
2009 2014 2015 2016 2017 2018 2019 2020
Concentration Indicators
Loans Deposits Capital
Fig 22B: Profit Concentration over the past decade at private banks: Market Share of Top 5 Banks
Source: Banks Survey data and NBE
82.9
46.7
42.3 44.242.3 41.5
40.0
51.4
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
2009 2014 2015 2016 2017 2018 2019 2020
Profit share
Fig 22C: EPS concentration at Private banks [top 5 banks vs all other banks]
Average EPS (Top 5 banks) Average EPS (all othes banks)
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
11
Banking Sector Outlook:— Shareholder Returns
§ In terms of shareholder earnings, while banks continue to offer attractive returns, average EPS levels have fallen from the high 30s to the low 30s over the past decade.
§ In addition, given recent levels of inflation, real returns declined sharply last year and are now around 12 percent, or roughly half the real returns seen by shareholders five years ago.
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
12
Banking Sector Outlook:—Performance across banks
§ Looking at the distribution of performance across banks, some financial metrics point a widening gap between the
highest and lowest performers over the past three years. § For profits, market shares among private banks had steadily narrowed over the years and reached a low range
(max minus min) of 16.3 percentage points in 2015-16; this has since rise to 22 percentage points, showing greater dispersion in market share within the private banking sector.
§ For EPS, there is an even larger dispersion among private banks, with the range in performance widening from a low of 26 percentage points in FY 2016-17 to 48 percentage points in FY 2018-19.
Fig 24A: Profit share changes at private banks
Source: Banks Survey data and NBE
20.3 17.7 17.0 17.8 18.7
23.9
19.9 17.3 16.3 16.9 17.4
22.4
0.4 0.4 0.6 0.9 1.4 1.5
-
5.0
10.0
15.0
20.0
25.0
30.0
2014 2015 2016 2017 2018 2019
Profit share changes across banks
Max Profit share Range in profit share Min profit share
Fig 24B: EPS changes at private banks
Source: Banks Survey data and NBE
67.0
58.9
48.7
40.9
54.3
63.2 57.90
52.30
44.30
26.00
41.20 44.70
9.1 6.6 4.4
14.9 13.1 18.5
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
2014 2015 2016 2017 2018 2019
EPS changes across banks
Max EPS Range in EPS Min EPS
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
13
Banking Sector Outlook:—Forecasts for FY 2021 and FY 2022
§ Looking ahead, we update our banking sector model from last year and forecast trends in the sector’s key growth drivers (deposits and fx) as well as its aggregate balance sheet, income levels, and rates of return.1
§ We expect Ethiopia’s banks to show somewhat slower growth this fiscal year, as anti-inflationary measures take precedence in the near-term and the recent policy stimulus is gradually withdrawn by mid-2021. Thereafter, and given Ethiopia’s still low starting base, we anticipate a return to stronger banking growth as (we presume) political economy conditions gradually normalize, COVID impacts fade away, and several longer-term growth drivers (the New Ten-Year Plan, Doing Business reforms, financial sector liberalization) begin to firmly take root.
§ With respect to average shareholder returns, we project—as before—that these will fall somewhat from past highs but still remain comfortably above 25 percent per annum in Birr terms.
1 Our projections from more than a year ago (May 2019) were generally within 5 to 15 percent of the actual June 2020 outturns. For June 2020, we had projected deposits of Birr 1,099bn vs a Birr 1,043 outturn (a 5 percent difference), loans of Birr 543bn vs a Birr 590bn outturn (an 8 percent difference), and total industry profits of Birr 36bn vs a Birr 31bn outturn (a 14 percent difference). For private banks alone, we had projected profits of Birr 13.2 bn, though this turned out even higher at Birr 16.9bn, and our EPS projection was correspongly lower at 27.7 percent vs an 31.5 percent estimated outturn.
Fig 25: Banking Sector Model--Key Balance Sheet, Income Statement, and Operating metrics
Source: Banks' Annual Reports, Bank Surveys, CBE website for CBE Annual Reports, NBE Annual Reports for Bond estimates,and Cepheus Research for certain estimates and projections
Actuals Projections
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
14
Ethiopia’s Private Banking Sector: Data Appendix
Sector-wide trends: data up to June 2020
1. Bank deposits by bank…………………………………………………………………………..………....…pg 15 2. Bank loans by bank……………………………………………………………………………………………....pg16 3. Capital levels by bank………………………………………………………………………………..….…...…pg17 4. Branch levels by bank…………………………………………………………………………………….….....pg18
Sector-wide trends: data up to June 2019
5. Balance Sheet ratios by bank……………………………………………………………………...………..pg 19 6. Income Statement ratios by bank …………………………………………………………………………pg 20 7. Productivity ratios by bank …………………………………………………………………………………..pg 21 8. Earnings per share by bank………………………………………………………..…………………….……pg 22
9. Bank-by-bank performance metrics for 2018-19.………………………………..…………..pgs 23,24 10. Aggregate private banking sector metrics for 2014-15 to 2018-19………………………...pg 25
Bank-by-bank performance: five-year overview up to June 2019
11. Awash Bank ……………………………………………………………………………………………..…………….pg 26 12. Dashen Bank …………………………………………………………………………………………..………………pg 27 13. Bank of Abyssinia …………………………………………………………………………………..…………..…..pg 28 14. Wegagen Bank ……………………………………………………………………………………..…………………pg 29 15. NIB Bank ……………………………………………………………………………………………..………………….pg 30 16. United Bank ……………………………………………………………………………………………..…………..…pg 31 17. Cooperative Bank of Oromia ……………………………………………………………………………………pg 32 18. Lion Intl Bank ……………………………………………………………………………………………………..……pg 33 19. Zemen Bank …………………………………………………………………………………………………….………pg 34 20. Oromia Intl Bank ………………………………………………………………………………………..……………pg 35 21. Bunna Bank …………………………………………………………………………………………………..…………pg 36 22. Berhah Bank ……………………………………………………………………………………………….……………pg 37 23. Abay Bank ………………………………………………………………………………………………………..………pg 38 24. Addis Intl Bank …………………………………………………………………………………………………………pg 39 25. Enat Bank …………………………………………………………………………………………………………………pg 40 26. Debub Global Bank ………………………………………………………………………………………..…………pg 41
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
15
Appendix Table 1: Bank Deposits as of June 2020 (Provisional data)
Source: Banks survey data (provisional data that may differ somewhat from final audited figures)
4.6
5.2
8.2
13.9
14.4
16.0
16.5
26.1
27.6
30.1
33.3
34.7
45.5
47.5
53.4
70.2
- 10.0 20.0 30.0 40.0 50.0 60.0 70.0
Addis
Debub
Enat
Bunna
Zemen
Abay
Berhan
Lion
OIB
Wegagen
NIB
United
CBO
Abyssinia
Dashen
Awash
Deposits (Birr bns), June 2020
11.014.2
18.418.5
21.922.523.623.624.024.725.325.8
27.728.629.2
40.9
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
EnatLionAbay
BunnaAbyssinia
AddisDashen
NIBBerhanUnitedDebub
OIBWegagen
AwashCBO
Zemen
% Checking Deposits, June 2020
4.1%10.9%
14.7%17.2%17.8%18.2%19.7%
24.1%26.1%26.6%
28.7%31.3%
38.8%48.5%49.6%
59.4%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
OIBBerhan
NIBEnat
AddisAwashDashenZemen
CBOUnited
WegagenBunnaAbay
AbyssiniaDebubLion
Deposits growth (Percent), June 2020
46.647.1
51.652.153.6
58.860.561.762.663.9
67.268.3
73.375.376.1
80.1
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
EnatAddisZemenUnitedDebub
NIBOIB
WegagenCBO
AwashDashenBerhan
AbyssiniaAbay
BunnaLion
% Saving Deposits, June 2020
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
16
Appendix Table 2: Bank Loans as of June 2020 (Provisional data)
Source: Banks survey data (provisional data that may differ somewhat from final audited figures)
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
17
Appendix Table 3: Bank Capital levels as of June 2020 (Provisional data)
Source: Banks survey data (provisional data that may differ somewhat from final audited figures)
1.4
1.5 1.8
3.1
3.2 3.4
3.5 3.7
4.3
4.6 5.4
5.6 5.7
5.8
8.6 13.6
- 2.0 4.0 6.0 8.0 10.0 12.0 14.0
Addis
DebubEnat
AbayBunna
Zemen
BerhanLion
WegagenOIB
CBO
UnitedAbyssinia
NIBDashen
Awash
Total Capital (Birr bns), June 2020
1.01.0
1.41.8
2.22.22.2
2.52.93.03.03.13.2
3.43.5
5.8
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0
AddisDebubEnat
ZemenBunnaAbayLion
BerhanWegagen
CBOOIB
AbyssiniaUnited
NIBDashenAwash
Paid-Up Capital, June 2020
16.1%18.6%
23.7%24.8%25.3%25.7%
27.7%28.4%
32.2%40.8%
44.5%45.7%46.2%
50.0%64.4%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
WegagenAbyssinia
EnatBunna
OIBDashenBerhan
AbayAddis
NIBAwashLion
UnitedZemenDebubCBO
Total Capital Growth, June 2020
11.712.212.612.612.913.1
14.214.214.414.6
15.916.316.7
17.718.1
20.2
0.0 5.0 10.0 15.0 20.0
DashenAbyssiniaWegagen
NIBUnited
CBOAwashLion
ZemenOIB
BunnaBerhan
AbayAddisEnat
Debub
Capital to Assets Ratio (Percent), June 2020
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
18
Appendix Table 4: Bank branches as of June 2020 (Provisional data)
Source: Banks survey data (provisional data that may differ somewhat from final audited figures)
52 57
75 82
223 231
243 258
300 302
344 382
420 423
466 503
- 100 200 300 400 500
ZemenEnat
AddisDebub
AbayBerhanBunna
LionOIBNIB
UnitedWegagen
CBODashenAwash
Abyssinia
No. of Branches, June 2020
0.0%8.0%
10.3%12.7%12.7%13.2%13.7%
15.5%15.7%16.1%
18.5%20.9%
25.5%26.7%
49.3%51.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%
DashenCBO
AddisLion
WegagenOIB
AwashBerhan
NIBAbay
BunnaZemenUnitedEnat
AbyssiniaDebub
2019-20 Branch Level %Change
-7 9
12 28 29 31 31 31
35 38
41 43
56 70
166
- 20 40 60 80 100 120 140 160 180
DashenAddis
ZemenEnat
DebubLionCBO
BerhanAbay
OIBBunna
NIBWegagen
AwashUnited
Abyssinia
2019-20 Branch Level Change
57 61 64
72 72
79 92 94
101 101
108 110
126 144
151 277
50 100 150 200 250
BunnaAddisDebub
BerhanAbay
WegagenOIB
AbyssiniaUnited
LionCBONIB
DashenEnat
AwashZemen
Deposit per Branch, Birr mns, June 2020
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
19
Appendix Table 5: Balance Sheet ratios as of June 2019
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
20
Appendix Table 6: Income Statement ratios as of June 2019
Source: Banks’ Annual Reports for FY 2018-19
32.243.0
46.046.4
52.058.160.5
65.065.065.366.166.468.4
71.771.8
77.4
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0
DebubAddisZemenAbayEnat
BerhanBunnaDashenAwash
OIBLionCBO
WegagenUnited
AbyssiniaNIB
Net Interest Income to Income Ratio (Percent), June 2019
26.327.3
33.535.937.337.438.438.5
41.041.141.942.543.1
45.249.8
52.2
0.0 10.0 20.0 30.0 40.0 50.0 60.0
ZemenEnat
UnitedNIB
AbayAwashDebubAddis
AbyssiniaLion
BunnaDashen
OIBWegagenBerhan
CBO
Costs (excluding interest) to Income, June 2019
22.628.228.3
31.633.633.934.735.035.0
39.541.9
48.053.654.0
57.067.8
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0
NIBAbyssinia
UnitedWegagen
CBOLionOIB
AwashDashenBunnaBerhan
EnatAbay
ZemenAddisDebub
Non -nterest Income to Income Ratio (Percent), June 2019
-3.1-0.4
0.00.91.2
2.22.8
3.23.5
4.04.14.2
4.66.56.9
8.0
-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0
UnitedDashenZemenEnatCBO
AddisNIB
AbyssiniaWegagen
DebubBunnaAbay
BerhanLionOIB
Awash
Provision Expenses to Total Expenses, June 2019
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
21
Appendix Table 7: Productivity ratios as of June 2019
Source: Banks’ Annual Reports for FY 2018-19
0.50.60.6
0.70.70.7
0.80.90.90.90.91.0
1.11.2
1.81.8
0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0
LionAbay
BerhanNIB
WegagenAbyssinia
CBOOIB
AwashUnitedDashenDebubBunnaAddisZemenEnat
Revenue per employee, June 2019
8.99.59.59.69.79.911.012.212.712.812.913.213.9
19.621.8
36.8
0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0
BunnaWegagen
CBOAbayLion
AddisBerhan
OIBAbyssinia
NIBDebubDashenUnitedAwashEnat
Zemen
Revenue per branch, June 2019
0.10.10.10.10.10.20.20.2
0.20.2
0.30.30.30.3
0.40.5
0.0 0.1 0.2 0.3 0.4 0.5 0.6
LionBerhan
AbyssiniaWegagen
NIBCBOAbay
DashenUnited
OIBAwashBunnaAddisDebubEnat
Zemen
Profit per employee, June 2019
1.71.8
2.32.32.32.32.42.42.62.72.82.8
3.94.5
5.911.3
0.0 2.0 4.0 6.0 8.0 10.0 12.0
CBOWegagenBunnaBerhan
AbyssiniaAddisLion
DashenAbay
UnitedNIBOIB
DebubEnat
AwashZemen
Profit per branch, June 2019
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
22
Appendix Table 8: Earnings per share ratios as of June 2019
Source: Banks’ Annual Reports. Note: Bank-by-bank EPS data for the just ended fiscal year (2019-20) are available on a provisional basis but are not presented here. The 2019-20 sector-average EPS of 31.5 percent reported on pages 1 and 3 is calculated from banks’ provisional after-tax profit figures applied to their estimated year-average paid-up capital.
Private Banks: Earnings per share over the past decade, in percent
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Cepheus Research compilaton based on Banks's Annual Reports
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Cepheus Research compilaton based on Banks's Annual Reports
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Cepheus Research compilaton based on Banks's Annual Reports
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Awash Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Dashen Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
28
Bank of Abyssinia: Summary Financials, Birr mn unless otherwise stated
Source: Bank of Abyssynia Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Wegagen Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: NIB Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
31
United Bank: Summary Financials, Birr mn unless otherwise stated
Source: United Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
32
Cooperative Bank of Oromia: Summary Financials, Birr mn unless otherwise stated
Source: CBO Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: LIon Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Zemen Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
35
Oromia International Bank: Summary Financials, Birr mn unless otherwise stated
Source: OIB Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Bunna Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Berhan Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Abay Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
39
Addis International Bank: Summary Financials, Birr mn unless otherwise stated
Source: Addis Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
Source: Enat Bank Annual Reports and Cepheus Research compilation
RESEARCH & ANALYTICS
Disclaimer: This report represents solely the views, analysis, and judgement of the Cepheus research team and does not necessarily reflect the views or opinions of the Fund’s Managing Partners, Advisors, or Investors.
41
Debub Global Bank: Summary Financials, Birr mn unless otherwise stated