Published On  Oct 09,  2011






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Lion’s Profit not so Profitable to Shareholders

Despite a 10pc increase in profits, dividends affected by 43pc increase in paid up capital


Lion International Bank (LIB) reported a modest increase in profit after tax of 43.7 million Br for the 2010/11 fiscal year; a 10.4pc increase from last year. However, the earning per share (EPS) shareholders would receive decreased by 12.9pc t0 4.4 Br per value of 25 Birr shares.

This is due to the difference in the rate of increase in profit and paid up capital, according to Abdulmena Mohammed, accounts manager for Portobello Group Ltd, a London-based holding company with subsidiaries in property investments and developments.

The paid up capital of the bank increased by 43pc to 292.7 million Br, while profits after tax by 10.4pc.

When measured on Return on Equity (ROE) and Return on Asset (ROA), both numbers showed a decline.  ROE for the fiscal year declined to 12.4pc, which must have been due to the big increase in paid up capital, while ROA declined to 2.4pc, mainly due to increase in total assets by 32.5pc, according to Abdulmena.

“The increase in capital should at least bring a comparable level of return with the existing capital, otherwise the return of shareholders always decline,” he told Fortune. “Lion is a highly liquid bank with a strong capital base, for which the management of the bank should design a mechanism to better improve the returns of its shareholders.”

Lion’s capita, as measured by Capital Adequacy Ratio (CAR), went up 53pc from 42pc the previous year, which is almost seven times more than the minimum 8pc the central bank has set.

The president of the bank, Negussu Gebregzabhir, who was appointed right before the fiscal year ended in June, 2011, agrees with this.

“We understand that a lot has to be done in order to reverse this situation,” he told Fortune.  “Although excess capital has a negative effect when it comes to shareholders’ returns, it can also help the bank in maximizing its profit in the future.”

Shareholders of the bank are expected to approve the amount of money to be paid in dividends when the bank holds its fourth annual shareholders meeting on October 29, 2011. In the previous fiscal year, they approved 20 million Br, receiving dividends for the first time since the establishment of the bank in 2007.

For the bank, which registered a three million Br profit after tax in the 2008/09 fiscal year and managed to increase it by 970 pc to 39.6 million Br in the subsequent year, this year’s performance of the bank falls below the achievements of private banks who have been around as long as LIB.



Oromia International Bank (OIB), which started operation in October 2008, recorded 56.8 million Br profit after tax (unaudited), 29pc increment from the previous year, while Cooperative Bank of Oromia (CBO), which began operation in 2005, managed to increase its profit after tax by 95pc from 25 million to 48.8 million Br (unaudited) in 2010/11.

Despite being modest, the performance of the bank was achieved in a challenging financial environment for banks, according to Negussu.

“The windfall tax on banks and central bank’s directive mandating us to buy government bonds using 27pc of all loans we give out has affected our performance,” he told Fortune.

Despite the increment in loans and advances by 16pc from 574.5 million to 666.5 million Br, the bank’s loan-to-deposit ratio declined to 51.4pc from 56.5pc.

“This must have been due mainly to the investment in government bonds amounting to 164.9 million Br, “according to Abdulmena. “However, the modest increment in loans and advances contributed considerably to the increment in interest income by 34.4pc.”

LIB, which started operations with a paid up capital of 176.6 million Br,  managed to increase its net income from interest from 36.7 million Br to 48.6 million Br.

Collecting such an amount of income from interest under the circumstances might be the result of a higher lending interest rate charged by the bank, according to Abdulmena.

The bank president disagrees.

“The bank’s lending interest rate is always determined by the interaction of supply and demand in the market,” he told Fortune. “Therefore, our interest rate is the same as other private banks.”

The bank enjoyed a 34.4pc increase in interest income, which reached Birr 75.77 million Br, and fundamentally contributing to the total revenue of 113.3 million Br. At the same time, Lion managed to reduce the provision for bad loans and advances significantly from 4.57 million Br to 324,000 Birr. This has contributed an approximate 8.5pc increase to the total revenue.



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