27 JULY 2020

CBZ Holdings (CBZ.zw) STOCK PROFILE

Sector Financials Rating : SELL Price ZW(c) 2,996.52 Price Target : 700cents Mkt Cap ZW$20,593,035,067

Initiate at Sell: Largest betting on agriculture 52 wk ZW(c) 69 - range ZW(c) 3,466.29

Improving fundamentals but very pricy . Shares 687,231,691. CBZ Holdings has outperformed peers on many metrics including growth in loan outstanding book, deposits and total income earned for the period FY2019. Cost to income has Directors’ significantly gone down for FY2019 and recently for the first quarter dropping to holding 31%. But CBZ has turned out very expensive based on multiple valuation and our intrinsic value estimate.

. Sector concentration raise risk levels CBZ holdings has significantly ramped up its concentration on agriculture sector. FINANCIAL HIGHLIGHTS 68% of outstanding loans are now agro-related. These numbers excluded loans financed from two bonds the bank issued in January this year. We are wary these concentration levels, notwithstanding the returns, come with risk. Profitability & Efficiency

. Less of a commercial bank and more of everything else ∆ Total Income 120% ∆ Net interest income -25% Despite outperforming peers on growth in loan book, CBZ is increasingly earning a ∆ Net Profit -30.3% significant chunk of its income from sources that we think are non-recurring and not core to operations. For example, 43% of the bank revenue had to do with FX related Cost to income 31% transactions. NPL Ratio 3.5%

FINANCIAL PERFORMANCE & RATIOS Valuations

Financial Performance FY2016 FY2017 FY2018 FY2019 P/E 65.8 Net interest income 109,125,679 81,600,467 509,862,729 382,263,658 P/BV 7.31 P/TBV 7.33 Fees and commissions 62,582,558 69,078,973 671,648,172 2,267,202,877 EPS 4.5 5.1 86.5 45.5 ROE 11.1% Loans and Advances 1,007,172,157 941,408,103 3,024,975,659 3,013,900,920 ROA 1.8% Dividend yield 0.13% Total Deposits 1,684,277,828 1,777,154,753 12,914,671,236 13,065,038,880

Ratios FY2016 FY2017 FY2018 FY2019 Balance Sheet - FY2019 Cost/ Income Ratio 64.0% 69.6% 59.7% 40.1% ∆ Loan to Total Assets 51.7% 48.3% 19.9% 16.9% Loan book growth -0.4% Total deposits growth 1.2% NPLs/Gross loans 7.5% 7.0% 2.7% 3.5% Total assets growth 17.2% ROE 8.4% 8.5% 22.9% 11.1%

BUSINESS DESCRIPTION

CBZ Holdings is ’s largest bank holding group by total assets, deposits, loans and market capitalization. In fact, the group is more valuable than the other four listed combined. CBZ Holdings Limited is a company that offers commercial banking, mortgage , asset management, short- and long- Analysts term , and other non-financial services. The Group’s major segments

Ray Chipendo, MBA include Banking, Insurance, Investments and Agro-Business. [email protected] +263 78 490 4355 It has various operating units, such as CBZ Bank Limited, which provides commercial banking and mortgage finance products; CBZ Asset Management (Private) Limited, Emmanuel Sibanda, MSc Econ which provides fund management services to investors through placement of either [email protected] pooled portfolios or individual portfolios, and CBZ Insurance (Private) Limited, which +27 67 079 5649 provides short term insurance. Its other operating units include CBZ Properties (Private) Limited, which acts as the property investment arm of the business; CBZ Life (Private) Limited, which provides long term life insurance.

INVESTMENT SUMMARY

We rate CBZ Holdings a “SELL” with a price target of ZW605cents. Current price is 2995.65cents. We adopted the excess returns valuation model to estimate the intrinsic value. Our assumptions behind the excess returns valuation include an ROE based on total comprehensive income of 40% in 2020 from 45% in 2019. The ROE ratio will decline by each year from 25% in 2021 to 20% in 2022 until it settles on a sustainable 16% going forward. Our cost of capital will decline as well and settle on a sustainable 14% into the long term. CBZ Holdings currently trades at a price to book multiple of 7.30 based on current price and the net book value (equity). Price to tangible book value is 7.33. CBZ Holdings is trading a premium to peers with the exception of FBC which trades at a Price to tangible book value of 12.25. The average price to tangible book value ratio for the other four banks is 5.20.

INVESTMENT RISKS

CBZ Holdings has morphed into a multi-segment company with multiple intersegment connections. The group does business with the State and the Reserve Bank more than any other institution in Zimbabwe. Further, new regulatory thresholds and

. Dependence on state programs and performance – CBZ has significant transactions and projects that involve the state and the RBZ. Most of these have to do with outstanding foreign currency payments. FY2019 financials point to receivables priced at ZW$7.6bn. The asset are RBZ’s legacy liabilities to be exchanged at 1:1. The queue of companies with similar arrangements with RBZ is quite long and the obligations are still largely unsettled.

. Liquidity – despite a high score on CAMELS test, CBZ Holdings has a significant liquidity mismatch for liabilities and assets that mature within a month and within the first 3months. Interest rate repricing gap for the first month was $9,1bn for the first month and the cumulative gap for the first 3months widens to $10.2bn.

All liabilities consist of deposits. A large migration of depositors from the bank would strain liquidity.

. Capital Calls - The published new capital requirements due December 2020. CBZ Holdings has several business units which will be liable to meet the capital requirements by end of the year. For example, commercial banks need to have a capital base of US$30m and building

societies US$20m. CBZ Holdings has both. At the current auction exchange rate of ZW$68/US$1, the group needs to have a capital base of ZW$3.5bn. The group may be required to cushion its balance sheet by raising additional capital. This will have a dilutive effect on existing shareholders.

. Valuation risk – we are concerned that the recent rally in share price of CBZ Holdings had less to do with the fundamentals but shareholder changes and speculation on transactions. When the dust settles, we are wary that the stock will reprice lower leading to losses on holders. Our intrinsic value estimates confirm this caution.

GROWTH

Growth Metrics CBZ FBC FCB ZBFH NMBZ Total income growth 119.5% 37% -12% 55% 13% Net interest income growth -25.0% -41% -36.3% -26.4% -48.8% Net profit Growth -30.3% -1055% -298% 467% -19% Loan book growth -0.4% 2% -42% -40% -46% Total deposits growth 1.2% -27% -40% -49% -56% Total assets growth 17.2% -12% -35% -14% -37%

. Despite steep inflation rates in the last three years total assets held by listed banks fell in the last financial year ending December 2019 save for CBZ Holdings.

The four banks had an average 25% decline in size of assets whereas CBZ’s assets rose by 17.2% - inflation adjusted. The group sold most its treasury bills and bonds from $7.7bn to $1.1bn in the period covered and most of the proceeds were turned into government grant receivables from the Reserve Bank of Zimbabwe. We have flagged these assets as the certainty of recouping the funds at the promised 1:1 exchange rate is questionable. FY2020 total assets were $17.8bn and have since jumped to $26bn by end of first quarter – March 2020.

. CBZ holdings also managed to hold the loan book recording a marginal 0.4% decline in loan book by December 2019. As per the first quarter 2020 results, the value of the loan book rose by 69% to $5.1bn. Some of the rise is on account of inflation adjustments. CBZ was the only bank to record growth in deposits by 1.2%. The other four listed banks had at least double-digit contraction in depositor base. ZBFH and NMBZ has at least a halving in their deposits size by December 2019.

Negative real interest rates and credit risk tanking lending business

Net interest income and interest earning assets CBZ Holdings

ZW$ Bilion

600,000,000 10.00 500,000,000 $509,862,729 8.00 $382,263,658 400,000,000 6.00 300,000,000

4.00 200,000,000 $109,125,679 2.00 $75,559,173 100,000,000 - - 2014 2015 2016 2017 2018 2019

Net Interest income Loans Interest earning assets Negative interest rates and falling consumer and business incomes are to blame for contracting interesting earning assets base and shrinking net interest income. By end of 2018, a mixture of government fixed income securities and loans amounting to $10.8bn yielded net interest income of $510m. FY2019 net interest income had plunged 25% to record $382m. CBZ Holdings had sold off most its $7.7bn TBs down to $1.1bn. To be clear, in 2019 interest rates closed the year in the 30%’s whereas inflation was 512% resulting in negative real interest rate of more than 400%.

Despite a spike in loans and advances by end of Q1 2020, we do not expect any marked rise in net interest income.

Net interest income’s contribution to total operating income has continued fall over the years. In 2015, net interest income was 66% and in the last financial year end period it plunged to 17%.

Non recurring net non -interest income a concern going forward

Net non-interest income - FY2019 CBZ Holdings ZW$ million 800 35% 32% 700 30% 600 26% 25% 500 21% 20% 400 13% 15% 300 10% 200 6% 100 3% 5%

- 0% Net income Unrealised Exchange Fee and Agro Other from foreign loss on FX gains on Commission business currency position change of Income income dealings functional currency

We are concerned that 51% of the total net non-interest income of $2.3bn for period ending December 2019, has to do with foreign exchange related income. We believe these sources of income provide less certainty for repeating in coming years. For example, 32% of the income was exchange gains on change of functional currency. This in our opinion is a once off revenue line.

Agro-business to become a dominant contributor of group’s income The group’s posture on agriculture as a sector have us believe that Agro business unit will increasingly become a significant contributor of the bank’s total income in the coming years. FY2019’s results show the unit was responsible for 17% of the total operating income. We expect FY2020’s contribution to be as high as 30%. As at the end of December 2019, agriculture loans of $1.8bn represented 68% of total outstanding loans. We are wary such sector concentration might pose risk to the business should the sector face challenges.

With the pressure for more transparency around government’s role in funding agriculture in Zimbabwe, we expect the role of banks to become more prominent in channeling funding to farmers. The bank issued two tranches of corporate bonds – one a US$50m and a second, ZW$500m to finance maize and soybean farming under the Commercial Contract Farming programme. Loans extended from these funding sources could explain the jump in loans and advances from $3bn to $5bn between FY2019 and Q12020. The bank however takes the foreign exchange risk on the US$50m bond and it is not clear if the underwrites it.

Missing the equities rally The period 2015-2017 was lucrative for banks that bought and held treasury bills which presented low risk and minimal costs for holding them. Plus, the coupons were competitive, even at some point becoming higher than private loan rates. But since 2018, rising inflation rendered TBs less attractive. Other banks, specifically FBC migrated to equities which for the most part yielded above inflation returns. As evidenced by FY2019 accounts, listed equities held were only $21m. If the same modest amounts have been held since then, we think the bank may have missed the last two stock market rallies that have seen the market soar by 670% for the first half outperforming inflation which was around 149%.

QUALITY

Ratios CBZ FBC FCB ZBFH NMBZ ROE 11.1% 12.5% -30.4% 28.8% 12.6% ROA 1.8% 2.0% -5.8% 12.3% 4.0% Cost to income ratio 40.1% 63.9% 110.1% 61.5% 42.5% Loan/Total assets 16.9% 41.2% 25.2% 12.8% 40.8%

CBZ returns trailing the index

On average CBZ returns have lagged peers in the last financial year end. ROE was 11.1%. With the exception FCB that recorded a negative net profit, players had better ROE performance than CBZ averaging 18%. ROA performance was also higher for the banks that outperformed CBZ on ROE.

On the contrary CBZ recorded the least cost to income ratio of 40.1% outperforming peers which averaged 70%. We take it that the bank’s poor returns’ showing may have been due to an overcapitalized balance sheet.

Q1 results show a promising picture.

CBZ Q1 results show improvement in cost efficiencies and returns performance. Cost to income ratio improved from FY2019’s 40.1% to close Q1 at 31%.

Efficiency Ratios CBZ Holdings 70% 12%

60% 10% 10% 9% 50% 8% 8% 40% 6% 30% 5% 4% 20%

10% 2%

0% 0% 2016 2017 2018 2019 Q12020 Cost to income Loan to deposits Net interest margin

Net interest margin, the ratio that represents net interest earned as a percentage of interest earning assets has risen since 2017. FY2019, net interest margin reached 9% from 5% in 2018. We theorise that the large consignment of TBs that the bank held in 2017 and 2018 may have depressed net interest margin. As the bank moves into agro-business we expect two things to happen. NPLs may rise but so do interest rates and by extension net interest margin.

We also encouraged that since FY2018, the percentage of deposits lying fallow is dropping. The ratio of loan to deposits has climbed up from 23.4% in 2018 to 23.1% in 2019 and spiked to 26%.

VALUATION

We have applied an excess returns valuation approach to estimate the intrinsic value of the bank. To draw comparison with peers and determine pricing of CBZ group we adopted popular multiples namely Price to book, Price to tangible book and Price to earnings ratios.

Multiples pricing

Ratios CBZ FBC FCB ZBFH NMBZ P/TBV 7.33 12.25 4.70 1.29 2.57 P/E 65.80 -27.00 -15.44 6.00 19.98 P/E Adjusted 25.00 35.00 37.00 4.40 5.00

Market Cap 20.6bn 9.9bn 2.5bn 1.79bn 1.68bn

CBZ’s market cap dwarfs the combined sizes of the other four listed banks by $5bn. The market puts a premium on CBZ and FBC banks which trade at price to tangible book values of 7.33 and 12.25 respectively.

Based on reported earnings, ZBFH is trading at the cheapest price earnings multiple of 6. CBZ holdings is trading at a multiple of 65.8 based on FY2019 earnings. FCB and FBC holdings recorded net losses in the period.

We adjusted earnings to account for disproportionate taxes and also deductions and additions that have nothing to do with the operations of the banks. CBZ holdings’ adjusted P/E value is 25 and is the third cheapest among the five banks. ZBFH still remains the most attractive bank.

Excess returns valuation

FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 Return on Equity 45.0% 40.0% 30.0% 25.0% 20.0% 18.0% Comprehensive income 883,553,896 1,127,334,524 1,173,555,239 1,262,549,845 1,254,974,546 1,348,595,647 Dividends 27,276,457 33,820,036 35,206,657 37,876,495 37,649,236 40,457,869 Retained earnings 856,277,439 1,093,514,488 1,138,348,582 1,224,673,349 1,217,325,309 1,308,137,777 Present vlaue (less cost of capital) 314,524,190 216,795,101 120,364,640 129,492,292 110,961,498 86,405,236 Opening Book Value 1,961,594,636 2,818,336,309 3,911,850,797 5,050,199,379 6,274,872,728 7,492,198,037

The excess returns valuation approach seeks to forecast bank’s earnings, extrapolate cost of capital and estimate the excess returns that will be generated in the future. Similar to the DCF the excess returns are discounted to today and added

to today’s current book value.

In using the excess returns we assumed returns on equity using comprehensive income would ease to 40% from the current 45%. It will continue to decline until reaching our long-term return on equity of 18%. We think as the current abnormal conditions calm, commercial banks will be forced to revert to their regulated and normal way of generating revenue – lending. This will compress returns overtime.

CBZ is believed to maintain its dividend paid ratio of 3% of comprehensive income. We have adopted a conservative cost of capital of 30%. This will decline overtime to a long-term rate of 15%. Based on the assumptions above we have estimated CBZ’s intrinsic value to be 700cents. CBZ is currently trading at 2,995cents. We regard the bank to be overvalued and trading at a steep premium to our estimated value.

Valuation Disclosures

Valuation analysis and results are specific to the purpose of valuation and the valuation date mentioned in the report as agreed per terms of our engagement. The analysis may not be valid for any other purpose or as at any other date. Also, it may not be valid if done on behalf of any other entity. Valuation analysis and results are also specific to the date of this report. A valuation of this nature involves consideration of various factors including those impacted by prevailing stock market trends in general and industry trends in particular. As such, Emergent Securities’ valuation results are, to a significant extent, subject to continuance of current trends beyond the date of the report. We, however, have no obligation to update this report for events, trends or transactions relating to the company or the market/economy in general and occurring subsequent to the date of this report.

In the course of the valuation, Emergent Securities may have been provided with both written and verbal information, including market, technical, financial and operating data by the subject company. We would, however, evaluate the information provided to us by the company through broad inquiry, analysis and review (but not carry out a due diligence or audit of the company for the purpose of this report, nor independently investigate or otherwise verified the data provided).

Affiliates Disclosures Emergent Securities does not trade in securities. However, its affiliate Emergent Capital Management may make investment decisions or take proprietary positions that can be consistent or inconsistent with the recommendations or views in this report. Emergent Securities’ officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time.

Other Important Disclosures Emergent Securities recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in this research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them.

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