awash and dashen

Battle of the Titans

Awash International And Dashen Banks’ Stiff Competition, the Defining Factors for this Year

Despite the fact that private banks are still a relatively new concept in Ethiopia, two stand tall among the nation’s 16 private banks: Awash International Bank and Dashen Bank. Both enjoy larger after-tax profits than their competitors do. According to the National Bank of Ethiopia (NBE), in the 2013/14 fiscal year alone, both banks’ collective net profits exceeded ETB1.37 billion, accounting for roughly 40Pct of the entire private banks’ after-tax profits that year. While the nature of their competition isn’t necessarily adversarial, both banks have been in stiff competition with one another in certain indicators – such as paid-up capital, total assets, and loan disbursements – in which each bank has enjoyed supremacy over the other in different years. However, the overall success of each bank obscures the reality behind the scenes: both have had their performance – and assets – adversely affected by foreign currency shortages, surging expenditures and liquidity challenges. EBR’s Fasika Tadesse explored each bank’s 2014/15 fiscal year performance – analysing the nuances of each company’s overall figures – in order to shed light on the two financial titans that have dominated Ethiopia’s private banking sector.

In 1991, following the downfall of the Dergue regime and the ascent of the Ethiopian People’s Revolutionary Democratic Front (EPRDF) to power, a few individuals came up with the idea to establish a private bank. Upon the demise of nearly two decades-long command economy and the partial liberalisation of Ethiopia’s banking sector, their desire bore fruit: Awash International Bank (AIB).
Although the promoters wanted to establish the Bank that year, AIB was licensed on November 10, 1994 – nearly three years after the initiative. The Bank finally opened its doors for services on February 13, 1995.
Shortly thereafter, Dashen Bank followed suit, starting operations in 1996. Since then, the financial sector has witnessed 14 additional private banks emerge within the past two decades, bringing the total number of banks in the country to 19, which includes the three state-owned banks.
Just like their emergence, Awash and Dashen still lead the private banking sector. The sector report released by the National Bank of Ethiopia (NBE) reveals that during the 2013/14 fiscal year the 16 private banks registered a cumulative after-tax profit of ETB3.6 billion. Collectively, Dashen and Awash registered ETB1.37 billion in after-tax profits, nearly 40Pct of the total.
Together, the two banks are veritable titans – leaders that dominate the country’s still burgeoning private banking industry. Nevertheless, comparing the performance of one against the other provides a different perspective, one that demonstrates that the two leaders are each other’s biggest competitors.
Even though Dashen was the second entrant to the sector, it has been dominating all private banks for many years in terms of loans and advances, profit, deposits and revenue. It has also been a torchbearer in the sector, investing hundreds of millions of dollars to acquire state-of-the-art banking technologies.
Acknowledging the fact that Awash ranks second among private banks in terms of profit, Tsehay Shiferaw, President of AIB, says they’re catching up. “The figures [of the past five years] show that Awash is the fastest growing private bank in the industry,” he told EBR.
Five years of data from the Bank demonstrates Awash’s growth is nearly on par with Dashen in some performance indicators. This is the result of the Bank’s rapid and sustained growth in the past five years. During the 2014/15 fiscal year, Awash obtained a net after-tax profit that is 4.4Pct higher than that of the previous fiscal year, while Dashen’s profit grew by only 2.4Pct, even though Dashen earned the highest net after-tax profit, amounting to ETB729.1 million. Awash came in second with a net profit of ETB645.3 million.
Even if Dashen continues to excel by registering higher profits compared with Awash, the profit difference between the two banks is narrowing each year. During 2011/12 fiscal year, the net profit difference between Dashen and Awash was ETB258 million: Dashen earned a net profit of ETB652 million and Awash obtained ETB394.4 million. That figure shows that Awash’s profit was 60.42Pct of Dashen that year, vividly demonstrating the huge gap between the two banks. During 2014/15 fiscal year, however, the difference narrowed significantly and Awash’s profit became 88.48Pct of Dashen’s.
“We are aggressively working with a target of becoming a leading private bank in all terms,” said Tabor Wami, Board Chairman of AIB, while addressing shareholders of the Bank during the company’s 20th General Assembly meeting on November 28, 2015 at the Hilton Addis.
Echoing Tabor’s statements, Tsehay says profit is not the only measurement to justify the strength of a bank. “We should consider other performance indicators to have a clear picture, too,” he says.
Part of Awash’s executives’ vision was realised in the 2014/15 fiscal year in taking over Dashen’s years of supremacy in some financial performance indicators, including total assets and loan disbursement.
In 2010/11, Awash’s total assets stood at ETB11 billion, while Dashen’s total assets were ETB14.7 billion. Four years later, the reality shifted. By the end of last fiscal year, Awash managed to increase its total assets to ETB25.2 billion, whereas Dashen’s stood at ETB24.8 billion.
Regarding the paid-up capital of the two banks, four years ago Awash had ETB734 million in paid-up capital, while Dashen had ETB698.7 million, a difference of ETB35.3million in favour of AIB. However, the paid-up capital of Awash grew to ETB1.8 billion as of June 30, 2015, while Dashen’s stood at ETB1.2 billion-a figure that is lower than Awash’s by ETB600 million.
Considering this, Awash seems to have a better position to comply with the government’s five-year plan for the banking sector. Following the robust economic growth registered in the country for over a decade – and the government’s aspiration to sustain that momentum – the central bank recently began drafting a legal framework that will increase the minimum paid-up capital of commercial banks to ETB2 billion by 2020 – representing a threefold difference from the current ETB500 million.
This is why the shareholders of Dashen decided to raise their paid-up capital to ETB1.5 billion by the end of June 30, 2016 during their General Assembly meeting, which was held on November 24, 2015 at the Sheraton Addis.
However, Awash, which managed to increase its paid up capital to ETB1.9 billion by November 2015, aims to increase its paid-up capital to ETB3 billion within three years.
Asfaw Alemu, the recently appointed President of Dashen, says competition in the banking sector is becoming stiff. “Some banks may extend beyond others and some may fall behind,” he says. “But Dashen will maintain its leading position in the future.”
Despite Asfaw’s claim, the growth in the provision of loans and advances is another indicator in which Awash has overtaken Dashen, although Dashen still leads all private banks in deposits mobilisation. The amount of loans and advances Awash provided last year increased by 36Pct, reaching ETB12.26 billion. With ETB19.5 billion in total deposits, the loan-to-deposit ratio showed an increase from the preceding year’s 56.5Pct to 64Pct.
Dashen disbursed ETB11.33 billion loans in the 2014/15 fiscal year, which is a 20Pct increase from the preceding year. Nevertheless, with deposits totalling ETB19.8 billion, the loan-to-deposit ratio of Dashen is lower than Awash’s, standing at 59.2Pct.
However, along with registering the highest gross income last fiscal year, Dashen’s expenses also stood tall among its competitors. The Bank’s expenditures reached ETB1.6 billion, an increment of 30.7Pct compared with the previous year, while Awash’s expenses were ETB1.43 billion, a growth of 31.8Pct from the prior fiscal year. “The main reason for the increase of our expense was the salary raise we made to our workers last year and the expansion of [area banks],” said Teka Asfaw, Board Chairman of Dashen. “We are concerned [about] the increasing expense and we decided to work on ways to minimise our expenditures, such as [owning] our own buildings to avoid rental costs, which in turn also generates income.”
According to its annual report, the main factor that caused Dashen’s expenses to rise was the 59.8Pct increment in employees’ salaries and benefits following the recently revised salaries and benefit package. The ever increasing cost of office rent, which soared by 45.5Pct last fiscal year, also poses a great challenge as the Bank pursues aggressive branch expansion.
Tsehay, President of Awash, whose expenses also grew by a similar rate last fiscal year, agrees with Teka regarding the main cause of their expense escalation. “To retain workers, we are forced to increase salaries for them as a mechanism to minimise turnover,” he told EBR.
To reduce their mounting operating expenditures in general and office rent in particular, the two banks have been investing in constructing and acquiring properties. Accordingly, Dashen has been constructing and acquiring numerous buildings throughout the country. At the end of the budget year, it had more than 20 buildings of its own in which 20 area banks provide full-fledged banking services. Similarly, Awash, beyond building a 2+18 floor edifice for its headquarters in Addis Ababa, has constructed and acquired eight more buildings throughout the country.
Growing employee turnover was also a challenge that both banks encountered last year. Dashen faced a leadership reshuffling when its President and two vice presidents resigned. In addition to this, its two newly appointed vice presidents were rejected by the NBE. On the other hand, Awash was challenged by high turnover among low-level management last year. Awash’s President, however, downplays the significance of this turnover, noting that the Bank’s attrition rate was less than 10Pct.
Despite the fact that Awash is winning in some metrics and Dashen in others, the earnings per share (EPS) of both banks have declined. Dashen’s EPS was ETB670 in 2013/14, but declined to ETB589 during the 2014/15 fiscal year. At the same time, Awash’s EPS declined from ETB475 in 2013/14 to ETB445 last fiscal year. The presidents of both banks blame the decline to the massive capital expansion the banks underwent in recent years.
Still, shareholders seem fine with the decline of the EPS. Yeheyes Assefa, who became a shareholder of Dashen in 2012, says that when the EPS declines while profit increases it means the bank is performing well because its capital base is expanding.
But EPS isn’t the only metric in which both banks fell short vis-à-vis previous years. In the 2014/15 fiscal year, the two banks gave less focus towards the expansion of their technological bases, such as increasing the number of their Automated Teller Machines (ATM) and point-of-sale (PoS) terminals.
For example, AIB did not add any new ATMs or PoS terminals to its system last fiscal year. It has been using its previously deployed 100 ATMs and 400 PoS machines, in addition to the 60 ATMs and 300 PoS terminals that it uses as a member of the Premium Switch Solution (PSS). Dashen added 50 new ATMs and 45 PoS terminals during the 2014/15 fiscal year. Those figures are down from 65 and 47 ATMs and POS, respectively, from the previous year. Dashen now owns 220 ATMs and 873 PoS machines in total.
When discussing AIB’s lack of investment in technologies last fiscal year, Tabor noted that the Bank plans to change that trend soon. “We are in the process of purchasing 150 ATM machines, which is expected to be finalised and deployed during the current fiscal year,” he said.
Just like the declining of their EPS and low level of technological advancement, both banks faced similar challenges last fiscal year: shortages of foreign currency and liquidity problems.
On the topic of the shortage of foreign currency, Asfaw of Dashen Bank says it boils down to one issue: the decline in export earnings of the country. “The overall export performance of the country during the 2014/15 fiscal year declined by 8Pct. And that is the main reason for the decline in foreign currency earnings of Dashen,” he told EBR.
On the other hand, Tsehay explains that in addition to the slowdown of the export earnings of the country, the repatriation of Ethiopian workers from Middle Eastern countries is another reason for the decline of their foreign currency earnings. More than 100,000 Ethiopians were deported from Saudi Arabia two years ago. Additionally, the government banned travel of labour to the Middle East a few years ago. This has affected the remittances the country has been receiving for years.
Indeed the lack of foreign currency is a serious problem facing the country as a whole – a reality to which both bank presidents allude. In fact, the problem is one that was recognised by the NBE during a two-day meeting they had with executives of banks in mid-November.
During the meeting, Yohannis Ayalew, chief economist and vice governor of the central bank, explained the situation to banking industry insiders: “The main reason for the shortage of the foreign currency was the poor performance of the export sector during the year and the rise in the share of investment to 40Pct in the country’s economy, which escalated the demand for foreign currency to import machineries and raw materials.”
Apart from the foreign currency shortage, both banks have experienced liquidity problems over the past four years, as they’ve collectively diverted a little more than ETB11.2 billion towards the purchase of NBE bills.
Dashen’s investments in NBE’s five-year bonds increased by 42Pct, reaching ETB5.8 billion last fiscal year. This investment covers 23.5Pct of total assets and 29.3Pct of the total deposits of the Bank. AIB invested ETB5.4 billion in NBE bills, a 32.6Pct increase from the previous year’s investment. This is 21.42Pct and 27.7Pct of its total assets and deposits, respectively.
Since the introduction of the NBE bill in 2011, the central bank managed to collect a total of ETB45 billion from the 16 private banks and the state-owned Construction and Business Bank. Of the total amount collected by the NBE, the two banks’ contributions account for roughly one-fourth of the total.
According to the presidents of both banks, the NBE bill encourages the private banks to work aggressively on resource mobilisation through expanding their branches. “But apart from its advantages, it affects the liquidity of Dashen,” Asfaw told EBR.
In line with Asfaw’s claims, the International Monetary Fund also notes that the NBE’s regulation has problematic implications for private banks. In its staff report, published in September 2015, the IMF recommends that the government of Ethiopia should phase out the requirement for private banks to use 27Pct their loan disbursements to purchase NBE bills.
However, officials at the NBE reject such recommendations. “The average liquidity ratio of the financial sector during the first phase of the Growth and Transformation Plan (GTP I) period, including the NBE bill effect, was only 14.8Pct, which is as per our target and expectation,” said Yohannis.
When the government introduced the mandatory NBE bills, its aim was to support the lingering manufacturing sector by diverting money from private banks, since they tend to prefer to disburse short-term loans as opposed to middle- and long-term lending options.
In fact, the annual reports of both banks reveal that each tend to lend to sectors that are not a priority for the government. The largest share of loans and advances of both banks went to the domestic trade and service sectors, whereas the government policy direction demands financing the manufacturing and export sectors. Of Dashen’s total loan disbursements, 37Pct went to domestic trade and services, while Awash financed the domestic trade and service sectors with 22.7Pct of its total loan amount.
“This will not happen after this year, as we designed and will start to implement a 10-year strategic plan that will enable us to work more with the manufacturing industries and exporters in line with the government’s policy,” Tsehay told EBR.
Nevertheless, Asfaw of Dashen defends his bank’s decision, saying that domestic trade and service take the highest share in terms of category but manufacturing will exceed when it is seen by sector, accounting for 25Pct of the total loan disbursement of the Bank’s loan portfolio.
The two banks have now become on par with one another in many performance indicators, even if they face common challenges. As a result, this year is likely to be a defining period for both banks. The central question is whether Dashen, with its history of leadership in the industry, can maintain its sectoral supremacy in the face of Awash’s fast growth and aspiration for regional dominance. EBR

4th Year • December 16 2015 – January 15 2016 • No. 34

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