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Watching CRDB: an analysis of the effects of the financial crisis

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The leading story on the global economic crisis in The Citizen newspaper on May 6th, 2009 is important for two reasons.

First, it attempted to put some real numbers on the impact of the global economic crisis on Tanzania’s banking system. The East African Central Bank Governors concluded a meeting in Kigali, Rwanda on May 12th. In their joint statement, they: 

‘confirmed that the EAC economies did not experience severe first round effects of the global financial crisis. They however observed that the EAC Partner States are not immune to global events in general, as their economies are currently suffering from second and third round effects, notably decline in export demand, slowdown in FDI and remittances, and decline in foreign aid to government.’

First-round effects refer to the huge, negative impact on the health of global banks of the devastating drop in the value of the financial securities (the ‘toxic’ assets based on sub-prime loans) which initiated the global economic crisis in the first place. Since Tanzania’s banks did not have any such toxic assets, they did not suffer such losses.

But as the global banks panicked and stopped lending, international credit dried up, followed by the demand for exports which is financed by this credit. The result was a huge 20-30% drop in export sales for all of the major sectors and companies, huge job losses across economies, and the evaporation of consumer spending which drives the global economic engine. These are the second- (export demand), third- (drop in foreign investment and remittances) and fourth- (decline in foreign aid) round effects which are beginning to show up in Tanzania’s economy, via the banking system.

Consider the second-round effects. When export demand falls – due to a combination of fewer buyers with cash and much lower prices – Tanzania’s commodity exporters (cotton, fish, tea, flowers, horticulture), who borrowed from the CRDB and others in mid-2008, find it difficult to raise the cash to repay the loans. Borrowers’ problems pose the most direct risk to Tanzania’s banks and its banking system. The severity will depend on how big these potentially problematic loans are relative to the whole banking system.

That is why The Citizen’s analysis of CRDB’s position is so instructive and is the second reason for the story’s importance.

In December 2008, CRDB was Tanzania’s largest lending bank (TZS 836 billion in loans) and second largest bank by assets (TZS 1.5 trillion) and deposits (TZS 1.27 trillion). So, due its sheer size, CRDB is as good a bellwether of the health of Tanzania’s banking system as you can get. If it has a large number of problem loans, other large lenders may have similar troubles. Also if it holds a large amount of other banks’ cash as inter-bank deposits its ability to return that cash is crucial. Any doubt about CRDB’s financial strength may worry depositors and cause them to withdraw their funds, leading to a devastating, and sometimes contagious, bank run.

A closer look at CRDB’s financial position reveals a less alarming picture. First, it had a very small TZS 3.35 billion of other banks’ money in December 2008, so it has no problem repaying them. Second, its total loan book of TZS 848 billion was just two-thirds of its customer deposits. Indeed in 2008, the growth in loans of TZS 248 billion was just short of the growth in deposits of TZS 259 billion. This combined with its cash pile of TZS 295 billion suggests that CRDB is very unlikely to run into any cash crunch problems anytime soon.

Finally, the TZS 168 billion reported as problem loans to crop buyers amounts to almost 20% of the bank’s loan book. If it was to all go bad simultaneously, a highly improbable event, CRDB’s profits would evaporate and the bank remain in the red for at least the next three years. However like any prudent bank, CRDB is secured, in part by the crops which it financed. As the price of the commodity rises (cotton is up by 10% in April 2009 alone, tea prices are up 15% since November, Arabica coffee is up 12%, but Robusta is down 18%) so too does the value of the bank’s collateral and the borrowers’ ability to sell and repay the loans. It may take longer than normal to fully repay the crop loans, but as things stand, CRDB’s financial strength can probably outlast the economic downturn.

However, there is a sting in the tail of The Citizen’s scrutiny, and this concerns the timing of its publication. The first article appeared just two days before the last day of its initial public offer (IPO) period. This may have affected investors’ appetite for the CRDB share offer. Bad news during one’s IPO cannot be good for investor sentiment.

A value-driven investor looking to buy CRDB shares will have had to consider the implications of the problematic loans on the value of the shares she wants to buy. The shares’ fundamental value will be determined by CRDB’s profit performance in 2009. If the crop loans do sour, profits will be negatively affected by provisions which will in turn have a negative impact on the bank’s earnings per share. But this will not be known until later in 2009 or even early 2010 when CRDB reports its full year results.

The speculative investor is more concerned about price than value because he wants to profit from a rise in CRDB’s share price when it starts trading on June 17. His biggest worry is that the article may have discouraged potential buyers of his shares when trading begins. Recent experience may calm his fears about investor appetite for bank shares.

In September 2008, investors spent almost TZS 100 billion chasing after just TZS 63 billion of NMB shares. A few months earlier, the Dar es Salaam Community Bank found itself attracting TZS 5.2 billion for a small TZS 1.5 billion share issue. In this instance, Danida Investment Fund asked for a very modest TZS 18.8 billion for a five percent share of CRDB. Can one newspaper article stem the flood of cash that is likely to be attracted by one of Tanzania’s banking giants? We shall know on June 3rd when the results of the IPO are announced.

Written by serengetiadvisersblog

May 19, 2009 at 17:11