The Cooperative Bank of Oromia (CBO) has reported an eightfold decline in its profit, from 312 million Br to below 40 million Br. This kind of a slide is rare in the private banking industry.
“This is a very shocking performance,” said Abdulmenan Mohammed Hamza, accounts manager at Portobello Group Ltd., a London based holding company.
The decline in profit was inflated as a result of a huge collection of money on letters of credits and telegraphic transfers.
The bank has been criticized over its practices of opening letters of credit (LC), without having sufficient foreign currency at hand to be paid to overseas clients of importers.
“Our growth rate has been high for the past few years, as we are at stage of normalization. The decline is obvious, “ said Belete Wagbeka, head of communications and research at CBO.
Opening letters of credit in order to leverage large amounts of forex income is common practice among banks in the country.
However, opening excessive letters of credit forced NBE to suspend Abera Deressa, the bank’s former board chairman, along with top level executives of the bank last year. At that time, the bank failed to meet the demand of 10 million dollar to its customers who opened letters of credit.
In 2014/15, CBO was even forced to update its annual report after it was rejected by the National Bank of Ethiopia for understating bad loans. There was a discrepancy between the currency CBO had in hand and the sum reported to the central bank.
Following the revision, it was found out that the bank’s provision for doubtful accounts was understated by 534pc. This changed some of the segments in the Bank’s report, specifically in profit and earning per share.
The latest financial statement of the banks also reveals the same trend observed in doubtful accounts.
Its provision escalated to 335 million Br as of June2016, 46pc higher than the preceding fiscal year.
The amount is considerably higher than last year and all banks. The amount is even higher than the total interest paid to depositors. This shows that a sizeable amount of loans and receivables went sour.
“The management of the bank needs to thoroughly investigate the cause of such bad loans and install appropriate systems to keep doubtful loans and other assets at acceptable level,” Abdulemanan, the banking expert, commented.
“Moreover, it should evaluate the existing loan portfolio for any additional provision.”
“Even though the previous crises affected our performance, we tried to reduce our non-performing loans to five percent as of December, 2016 from 12pc a year ago”, Belete said.
An audit report released on February 2016 revealed that the bank has made invalid loans to the tune of 388 million Br.
This includes a 316.2 million Br alleged embezzlement at a Dire Dawa branch involving non-sufficient fund cheques and fraudulent loans.
The bank also registered its lowest shareholder return to date.
It earnings per 1,000 have collapsed to 40 Br from 420 Br.
Other than interest income all income items have hugely dropped.
Interest income increased by 17.4pc to Birr 823.67 million. while its commissions and service charges plummeted by 53pc to 182 million Br.
The same trend was observed in the bank’s gains on foreign exchanges. It declined by 57pc Br to 59.41 million.
Such declines were related to the mismanagement of foreign currencies a year ago.
Last year, Wondimagegnehu Negera, former president of CBO and the current head of Oromia Regional Trade and Market Development Bureau, along with two of his deputies were suspended in relation to the bank’s conduct in foreign exchange operations.
More than 20 branch managers and dozens of executives have also left their positions for related reasons.
Following the crisis, the bank instituted a new organizational structure. It replaced its suspended VPs with three new VPs, mainly from the Commercial Bank of Ethiopia, where Deribe served as VP.
In 2014/15, the Bank was the top forex gainer among all private banks in the country.
However, in 2015/16, the bank’s huge reduction in income was accompanied by a considerable expansion in expenses.
Interest expenses soared by 66pc to around 230 million Br and general administration expenses went up by 23.3pc to almost 290 million Br.
“We put large chunk of money as a provision, which resulted in our expense hitting the roof,” Belete argued.
As part of the trend observed in the industry, CBO showed a 7.5pc reduction in its total assets during the last fiscal year to 10.6 billion Br.
This fall was justified by a reduction in loans and advances.
CBO disbursed loans and advances of close to a billion Birr, 11pc lower than the preceding fiscal year.
“This is a very disappointing,” said Abdulemanan.
The bank mobilized deposits of 8.407 billion Br, an increase of 14pc. Accordingly, the loan to deposits ratio at CBO collapsed to 70pc from 89pc.
Even though the decline is huge, Abdulmenan argues it is still above the industry’s average.
Established 12 years ago, CBO has more than 170 branches across the country.
Source : Fortune