Zimbabwe banks punch above their weight, says report

ZIMBABWE'S banks are overvalued, trading above their historical average multiples as well as above comparable regional banks in more stable economic environments, research firm, IH Securities, said yesterday.

The firm said profits being generated by the banking sector had been "elevated over the past two years, owing to inflation driven earnings and non-cash revaluations".

The advisory firm, however, said it had observed stable economic indicators over the past 12 months, particularly inflation and exchange rate.

It said this stability will spill into next year.

"On this backdrop, we expect margins to correct downwards while revaluations are expected to smoothen, interim results being released in the June 2021 period are already reflecting this trend. As a result, we believe the current valuations are not sustainable as earnings moderate. We recommend reducing exposures to the banking sector at these levels," it said.

Based on December 2020 financial results, IH said Zimbabwean banks were trading at a price-to-book ratio of 2,8x compared to regional peers trading at 0,90x.

The price-to-book ratio is used to compare a firm's market capitalisation to its book value.

A company with a high price-to-book ratio could mean the stock price is overvalued, while a company with a lower priceto-book could be undervalued.

"This implies Zimbabwean banks have been trading at 102,25% premium compared to regional peers despite the former realising negative real returns. Based on this aggregate valuation, we recommend reducing exposure to Zimbabwean banks at current levels," it said.

IH said return on asset (ROA) and return on equity (ROE) for Zimbabwe's banks closed the year significantly high on the back of elevated translation gains on foreign currency denominated assets, revaluation gains from investment properties, as well as fees and commissions.

With the country expected to grow by 7,8% in 2021 owing to a good agricultural season and increased energy production, IH believed the current economic stability could be sustained into 2022.

"We do not foresee any major policy changes taking place at least in the shortterm owing to the current economic development taking place. Resultantly, we believe ROE and ROA are going to sharply correct downwards towards historical averages as revaluations start tapering off," it said.

"We expect the currently elevated price to book valuations to correct as earnings begin to sharply moderate and fundamentals re-emerge. The same trend is expected for price to earnings ratios. We also expect net fees and commission revenue contribution to continue increasing, again on the back of this fourth revolution."

Despite the fact that ROA has been increasing over the past five years, IH said it still underperforms annual inflation rate.

Although month-on-month inflation has been going down lately, IH anticipated the annual inflation rate to close the year still higher than ROA.