Page 40 - Capricorn IAR 2020

GROUP CEO’S REPORT FINANCIAL DIRECTOR’S REVIEW STRATEGY AND MATERIAL MATTERS
Cavmont Bank
Following the announcement of the sale of Cavmont Bank to Access Bank Zambia, the former’s results are treated as a discontinued operation in the annual financial statements. Cavmont Bank’s income and expenditure are disclosed separately from continued operations for both the current and comparative periods. All assets and liabilities pertaining to Cavmont Bank are disclosed separately as held for sale on the statement of financial position as at 30 June 2020.
Cavmont Bank incurred losses in the current year of ZK152.1 million (N$155.7 million), which represents a significant increase over the loss after tax of ZK16.1 million (N$19.8 million) of the prior year. Included in the loss of the current year is ZK28.1 million restructuring costs, while abnormal foreign exchange losses
of ZK23.5 million were incurred. Impairment charges increased to ZK22.9 million, consisting of an IFRS 9 economic overlay charge of ZK9.8 million and a charge of K7 million on stage 3 impairments as a result of a deteriorating US$-based non-performing book. A ZK63 million deferred tax asset was written off in anticipation of the sale of Cavmont Bank to Access Bank Zambia.
The new normal is expected to have a lasting impact on banks’ ROE
Return on average equity (%)
Towards the end of 2019 analysts estimated that only half of the world’s largest 50 banks would achieve double-digit ROE figures in 2020, though the current economic trajectory is likely to see this number erode. This is according to EY in their 2020 report: Banking in the new decade.
An increased return on equity over time is the outcome of a combination of key indicators and the overall measure of a bank’s success.
The Group achieved a ROE of 12.6% (2019: 16.3%) as a result of the following:
• Net interest income constituted 44.5% of operating income – lower than our target and significantly muted by the impact of COVID-19 measures on customers.
• Net interest income after impairment was impacted by the margin compression as a result of the steep interest rate cuts and significant increase in impairments mainly due to future economic overlay applied.
• The cost-to-income ratio was 59.4% – higher than expected due to the lag in the reprice of funding, higher impairments due to the pandemic and a large portion of the Group’s cost being fixed and not able to adjust significantly, but reduced with the disclosure of Cavmont Bank as a discontinued operation.
• The ratio of non-performing loans as a percentage of loans and advances is on an increasing trend as a result of the economic devastation caused by the pandemic on top of a recessionary economy. This year, the ratio was 4.7% compared to our target of less than 4.5%. However, this remains moderate compared to industry averages in the region.
• The loan-to-funding ratio of 87.9% is within risk appetite.
• Entrepo, CAM and Paratus were not significantly impacted by
economic challenges and continued to perform well.
• The divestment in Cavmont Bank and the restructure of
Capricorn Capital is expected to have a positive impact on ROE in the next financial year.
Taking the above into account, Capricorn Group delivered resilient returns under volatile conditions, and outperformed competitors. To maintain this position, we continue building on the strength of our diversified operations and revenue streams while investing in digital and data to enhance the client experience.
25 20 15 10
5 0
2016 2017
2018 2019
2020
Impact of COVID-19 on profit before income tax
Profit before tax from continued operations
Net interest income impact
Non-Interest income impact
IFRS 9 COVID-19 Overlay
Adjusted profit before tax from continued operations
2019
1,422,902
1,422,902
Variance
(56,012)
222,668
Var (%)
(3.9%)
15.6%
2020
1,366,890
97,972
44,291
136,417
1,645,570
38
12.6 3,49