Annual Financial Report

NMBZ HOLDINGS LIMITED

Holding company of

NMB BANK LIMITED (Registered Commercial Bank)

FOR THE YEAR ENDED 31 DECEMBER 2010

HIGHLIGHTS

Enquiries:

NMBZ HOLDINGS LIMITED Tel: +263-4-759 651/9

Benefit P Washaya, Chief Executive Officer [email protected]

Benson Ndachena, Chief Financial Officer [email protected]

Website: http://www.nmbz.co.zw

Email: [email protected]

CHAIRMAN'S STATEMENT

INTRODUCTION

The year witnessed a relatively stable economic environment which is attributable to the adoption of the multi - currency regime by the two year old inclusive government. The relative political stability and the re-engagement of the international community resulted in some growth in business activity in the period under review with some lines of credit trickling into the country.

GROUP RESULTS

Compliance with International Financial Reporting Standards

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have been prepared in compliance with the Companies Act (Chapter 24:03) and the Banking Act (Chapter 24:20).

Commentary on results

The profit before taxation was US$942 556 during the period under review. An attributable profit of US$692 234 was recorded for the period. Net interest income was US$6 871 468 for the period. Non-interest income amounted to US$9 374 796 and this was mainly as a result of commissions and fee income (US$9 691 069) which was partly offset by an unfavourable fair value adjustment on investment properties (US$784 600).

Operating expenses amounted to US$15 365 768 and were driven largely by administration, staff related expenditure and an impairment loss on land and buildings. Staff related expenditure includes an amount of US$3.1 million for the retrenchment exercise which was concluded in August 2010. The retrenchment of staff was necessary in order to streamline the Bank's operations in line with business volumes in the dollarised environment.

Impairment losses on loans and advances amounted to US$971 803 for the current period. This is commensurate with the loans and advances which amounted to US$57 913 589 at 31 December 2010.

The second half of the year recorded an after tax profit of US$2.6 million which offset the loss recorded in the first half of the year. The result for the first half was affected adversely by the provision for retrenchment costs (US$2.6 million), the fair value adjustment on investment properties (US$584 600) and the impairment loss on land and buildings (US$585 000).

Dividend

In view of the need to retain cash in the business and to buttress the statutory capital requirements for the Bank, the Board has proposed not to declare a dividend.

STATEMENT OF FINANCIAL POSITION

The Group's total assets grew by 159% from US$39 707 931 as at 31 December 2009 to US$102 839 504 as at 31 December 2010 and comprised mainly loans, advances and other accounts (US$60 315 317), financial assets at fair value through profit and loss (US$17 299 592), cash and short term funds (US$18 346 939), investment properties (US$2 615 000) and property and equipment (US$3 697 893). Gross loans and advances increased by 363% from US$12 509 344 as at 31 December 2009 to US$57 913 589 at 31December 2010 as a result of the improved underwriting capacity from new capital raised during the period, an increase in onshore deposits and lines of credit of US$12 million availed to the Bank.

Capital

The banking subsidiary's capital adequacy ratio at 31 December 2010 calculated in accordance with the guidelines of the Reserve Bank of Zimbabwe (RBZ) was 17.49% (31 December 2009 - 26.03%). The minimum required by the RBZ is 10%.

The Group's equity increased by 120% from US$8 568 005 as at 31 December 2009 to US$18 833 125 as at 31 December 2010 as a result of new capital raised and retained earnings.

The rights issue exercise which was undertaken during the year in order to meet the banking subsidiary's statutory minimum paid up capital of US$12.5 million raised gross proceeds of US$10.28 million. The amount raised has been used to recapitalise the Banking subsidiary and the Holding company. In late 2010, the Holding company acquired an associate interest in a leasing business.

OUTLOOK AND STRATEGY

The Group will continue to underwrite more business and explore value adding opportunities in the market. The quest for lines of credit would be an imperative in the outlook period in order to meet the growing funding requirements of our clients.

DIRECTORATE

Mr James Andrew Mushore was appointed the Group Chief Executive Officer on 23 April 2010. Messrs Jonathan Chenevix - Trench and James de la Fargue were appointed to the Board on 16 June 2010. I welcome Messrs Mushore, Chenevix - Trench and de la Fargue to the board and wish them a successful tenure in office.

Dr G M Mandishona and Mr C Chipato resigned from the board effective 17 August 2010. Mr B P Washaya resigned from the Holding Company Board with effect from 16 June 2010. I would like to thank them all for their invaluable contribution to the Board over the years. In particular, I would like to pay special tribute to Dr. Gibson Mandishona, my predecessor as Chairman, who led the Bank through its most difficult and challenging days in a most exemplary manner. We shall miss his wise counsel in the board room. I was appointed Chairman of the Board on 17 August 2010.

APPRECIATION

I would like to express my utmost appreciation to our clients, shareholders and Regulatory Authorities for their continued support. I would also like to thank my fellow Board members, management and staff for their steadfast commitment and dedication.

T N MUNDAWARARA

CHAIRMAN

15 March 2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2010

*Certain amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made as detailed in note18.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2010

*Certain amounts shown here do not correspond to the 2009 financial statements and reflect adjustments made as detailed in note18.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2010

*Deemed balances were derived using the principles outlined in note 2.1.

*\* These were previously accounted for in the statement of comprehensive income but have now been recognized as a transfer from retained earnings to a regulatory reserve (note 18).

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2010

NOTES TO THE FINANCIAL STATEMENTS

for the year ended 31 December 2010

1. REPORTING ENTITY

The Company is incorporated and domiciled in Zimbabwe and is an investment holding company. Its registered office is 64 Kwame Nkrumah Avenue, Harare. Its principal operating subsidiary is engaged in banking and other companies hold investments. 

2. ACCOUNTING CONVENTION

Statement of compliance

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board.

The financial statements have been prepared in compliance with the Companies Act (Chapter 24:03) and the Banking Act (Chapter 24:20).

The financial statements were approved by the Board of Directors on 15 March 2011.

2.1 Basis of preparation

The Group is resuming presentation of IFRS financial statements after early adoption of Revised IFRS1 First-time adoption of International Financial Reporting Standards issued on 20 December 2010. The Group failed to present IFRS financial statements for the financial year ended 31 December 2009 due to the effects of severe hyperinflation as defined in Revised IFRS1. The first amendment replaces reference to a fixed date of '1 January 2004 'with 'the date of transition to IFRS', which eliminates the requirement to reconstruct transactions that occurred before the date of transition to IFRS. These amendments provide guidance for entities emerging from severe hyperinflation to resume presenting IFRS financial statements. An entity can elect to measure assets and liabilities at fair value and to use the fair value as the deemed costs in its opening IFRS statement of financial position. The Group elected to use the severe hyper inflation exemption.

The effect of the application of this amendment is to render the opening statement of financial position, prepared on 1 January 2009 (date of transition to IFRS) IFRS compliant. The opening statement of financial position was reported in the prior year as not being compliant with International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates and IAS 29, Financial Reporting in Hyperinflationary Economies. The Group's previous functional currency, the Zimbabwe dollar (ZW$),was subjected to severe hyperinflation before the date of transition to IFRS because it had both of the following characteristics:

(a) a reliable general price index was not available to all entities with transactions and balances in the ZW$ and

(b) exchange ability between the ZW$ and a relatively stable foreign currency did not exist.

The Group changed its functional and presentation currency from the ZW$ to the United States dollar (US$) with effect from 1 January 2009.

2.2 Deemed cost exemption

The Group elected to measure certain items of property and equipment, loans and other receivables, inventories and deposits and other payables at fair value and to use the fair value as the deemed cost of those assets and liabilities in the opening IFRS statement of financial position.

2.3 Comparative financial information

The financial statements comprise three statements of financial position, two statements of comprehensive income, changes in equity and cash flows as a result of the retrospective application of the Amendments to IFRS 1. The comparative statements of comprehensive income, changes in equity and cash flows are for twelve months.

2.4 Reconciliation of previously prepared to IFRS compliant financial statements

In preparing its opening IFRS statement of financial position, the Group had not adjusted amounts previously determined in accordance with the Guidance on Change in Functional Currency 2009. As amounts have not changed, reconciliations have not been presented.

2.5 Historical cost convention

The financial statements are prepared under the historical cost convention except for quoted and other investments, properties, investment properties and financial instruments which are carried at fair value.

2.6 Functional and presentational currency

The Group changed its functional and reporting currency from the Zimbabwe dollar to the United States of America dollar with effect from 1 January 2009. These financial statements are reported in United States of America dollars and rounded to the nearest dollar.

As a result of the change in functional and reporting currency on 1 January 2009, the opening balances for the Group were re-established as of this date. The balances which were in foreign currency were taken at the recorded amounts, with cross rates applied as appropriate. The other balance sheet items which were not recorded in US$ but had a US$ equivalent were re-established using the first available evidence in 2009 of its US$ value.

The net effect of the re-establishment of the Group's assets and liabilities as at 1 January 2009 gave rise to a change in functional currency balance denoted as a non-distributable reserve. The non-distributable reserve was utilized in 2010 for the re-denomination of the Company's share capital after the requisite statutory and shareholder approvals.

2.7 Use of estimates and judgments

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.

In the process of applying the Group's accounting policies, management has made the following judgements which have the most significant effect on the amounts recognised in the consolidated financial statements:

2.7.1 Deferred tax liability

Provision for deferred taxation is made using the liability method in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences arising out of the initial recognition of assets or liabilities and temporary differences on initial recognition of business combinations that affect neither accounting nor taxable profit are not recognised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

In determining the amounts used for taxation purposes the directors referred to applicable effective exchange rates at the date of acquisition of assets or incurring of liabilities. The Zimbabwe Revenue Authority (ZIMRA), announced provisional methods to account for the deferred tax arising on assets purchased in ZWD. These methods require the preparer to first estimate the equivalent USD value of those assets at the time of purchase. Since the measurement of transactions in Zimbabwe dollars in the prior periods is affected by several economic variables such as mode of payment and hyperinflation this is an area where the directors have had to apply their judgement and acknowledge there could be significant variations in the results achieved depending on assumptions made.

2.7.2 Land and buildings

The properties were valued by professional valuers. The valuer applied the rental yield method to assess fair value of land and buildings. The determined fair value of land and buildings is most sensitive to the estimated yield as well as the long term vacancy rate. In addition, the property market is currently not stable due to liquidity constraints and hence comparable values are also not stable.

2.7.3 Investment properties and property and equipment

Investment properties were valued by professional valuers.

The professional valuers considered comparable market evidence of recent sale transactions and those transactions where firm offers had been made but awaiting acceptance. In addition, the property market is currently not stable due to liquidity constraints and hence comparable values are also not stable.

The directors exercised their judgement in determining the residual values of the other property and equipment which have been determined as nil.

2.7.4 RBZ Forex Bond

The RBZ Forex Bond was valued at cost as there is currently no market information to facilitate the application of fair value principles. There is currently no active market for these bond. 

2.7.5 Impairment losses on loans and advances

The Bank reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be recorded in profit or loss. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. In estimating these cash flows, the Bank makes judgements about the borrower's financial situation and the net realisable value of collateral. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. Loans and advances that have been assessed individually and found not to be impaired and all individually insignificant loans and advances are then assessed collectively, in groups of assets with similar risk characteristics, to determine whether provision should be made due to incurred loss events for which there is objective evidence but whose effects are not yet evident. The collective assessment takes account of data from the loan portfolio (such as credit quality, levels of arrears, credit utilisation, loan to collateral ratios etc.), concentrations of risks and economic data.

The impairment loss on loans and advances is disclosed in more detail under note 8 below.

2.7.6 Going concern

The Directors have assessed the ability of the Group to continue operating as a going concern and believe that the preparation of these financial statements on a going concern basis is still appropriate. However, the Directors believe that under the current economic environment a continuous assessment of the ability of the Group to continue to operate as a going concern will need to be performed to determine the continued appropriateness of the going concern assumption that has been applied in the preparation of these financial statements.

2.7.7 RBZ Statutory reserves

 The statutory reserves are stated at cost as IFRS principles of amortised cost could not be applied due to the significant uncertainty as to the expected receipt date.

3. ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these abridged financial statements are set out in Note 2 and 3. These policies have been consistently applied unless otherwise stated.

3.1 Financial instruments

3.1.1 Classification

Financial assets and liabilities at fair value through profit and loss include financial assets and liabilities held for trading i.e. those that the Group principally holds for the purpose of short-term profit taking as well as those that were, upon initial recognition, are designated by the entity as financial assets or liabilities at fair value through profit and loss. There is no reclassification into or out of this category as per IAS 39.

 Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market other than those classified as held-for-trading and the Group upon initial recognition designates as at fair value through profit or loss and those the Group upon initial recognition designates as available-for-sale.

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity.

Financial assets available-for-sale are non-derivative financial assets that are designated as available-for- sale or are not classified as loans and receivables, held-to-maturity investments or financial assets at fair value through profit or loss.

3.1.2 Recognition

The Group recognises financial assets at fair value through profit and loss and available for sale assets on the date it commits to purchase the assets. From this date any gains and losses arising from changes in fair value of the assets are recognised in the income statement and other comprehensive income respectively.

Held-to-maturity investments and loans and receivables are recognised at cost which is the fair value of the consideration given on the day that they are transferred to the Group.

3.1.3 Measurement

Financial assets and liabilities are measured initially at fair value. Subsequent to initial recognition, financial assets and liabilities at fair value through profit and loss and available-for-sale financial assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, less impairment losses.

Held-to-maturity investments and loans and receivables are measured at amortised cost less impairment losses. Amortised cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument.

3.1.4 Fair value measurement principles

The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques.

Where discounted cash flow techniques are used, estimated future cash flows are based on management's best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date.

3.2 Investment properties

Investment properties are stated at fair value. Gains and losses arising from a change in fair value of investment properties are recognized in the income statement.

3.3 Share - based payments

The Group issues share options to certain employees in terms of the Employee Share Option Scheme. Share options are measured at fair value at the date of grant. The fair value determined at the date of grant of the options is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest. Fair value is measured using the Black-Scholes option pricing model. The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and other behavioural considerations.

3.4 Property and equipment

International Accounting Standard 16 (IAS 16) stipulates that the residual value and the useful life of an asset must be reviewed at least each financial year-end. If the residual value of an asset increases by an amount equal to or greater than the asset's carrying amount, then the depreciation of the asset ceases. Depreciation will resume only when the residual value decreases to an amount below the asset's carrying amount.

4. INTEREST INCOME

5. non-interest income

6. Operating EXPENDITURE

7. taxation

8. IMPAIRMENT LOSSES ON LOANS AND ADVANCES

Impairment losses are applied to write off advances in part or in whole when they are considered partly or wholly irrecoverable. The aggregate impairment losses which are made during the year are dealt with as per paragraph 8.3.

8.1 Specific provisions

Specific provisions are made where the repayment of identified advances is in doubt and reflect estimates of the loss. Advances are written off against specific provisions once the probability of recovering any significant amounts becomes remote.

8.2 Portfolio provisions

The portfolio provision relates to the inherent risk of losses which, although not separately identified, is known to be present in any loan portfolio.

The Banking Regulations 2000 gives guidance on provisioning for doubtful debts and stipulates certain minimum percentages to be applied to the respective categories of the loan book.

International Accounting Standard 39, Financial Instruments Recognition and Measurement (IAS 39), prescribes the provisioning for impairment losses based on the actual loan losses incurred in the past applied to the sectoral analysis of book debts and the discounting of expected cash flows on specific problem accounts.

The two prescriptions are likely to give different results. The Group has taken the view that where the IAS 39 charge is less than the amount provided for in the Banking Regulations, the difference is recognized directly in equity as a transfer from retained earnings to a regulatory reserve and where it is more, the full amount will be charged to the profit or loss.

8.4 Non-performing loans

Interest on loans and advances is accrued to income until such time as reasonable doubt exists about its collectability, thereafter and until all or part of the loan is written off, interest continues to accrue on customers' accounts, but is not included in income. Such suspended interest is deducted from loans and advances in the statement of financial position. This policy meets the requirements of the Banking Regulations 2000 issued by the RBZ.

9. EARNINGS PER SHARE

Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary equity holders of NMBZ Holdings Limited by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share is calculated by dividing the profit attributable to ordinary equity holders of NMBZ Holdings Limited adjusted for the after tax effect of: (a) any dividends or other items related to dilutive potential ordinary shares deducted in arriving at profit or loss attributable to ordinary equity holders of the parent entity; (b) any interest recognised in the period related to dilute potential ordinary shares; (c) any other changes in income or expense that would result from the conversion of the dilutive potential ordinary shares, by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

Headline earnings per share is calculated by dividing the profit attributable to ordinary equity holders of NMBZ Holdings Limited (excluding separately identifiable re-measurements, relating to any change in the carrying amount of an asset or liability, net of related tax (both current and deferred), other than re-measurements specifically included in headline earnings) by the weighted average number of ordinary shares outstanding during the year.

9.1 Earnings

9.2 Number of shares

11.3 Earnings per share (US cents)

11.4 Headline earnings

10. SHARE CAPITAL

Of the 692 892 711 unissued ordinary shares, options which may be granted in terms of the NMBZ 2005 Employee Share Option Scheme (ESOS) amount to 85 360 962 and out of these 1 670 869 had not been issued. As at 31 December 2010, 9 072 000 share options out of the issued had not been exercised.

Subject to the provisions of section 183 of the Companies Act (Chapter 24:03), the unissued shares are under the control of the directors.

The share capital was re - denominated after the requisite shareholder approvals on 17 June 2010 and the subsequent regulatory approvals.

10.3 Own equity instruments

Own equity instruments amounting to 1 028 172 shares at a cost of US$8 225 which were held by the Company's subsidiary, Stewart Holdings (Private) Limited, were disposed off during the year for a consideration of US$9 012.

11. DepositS and other accounts

11.2 Maturity analysis

12. FINANCIAL INSTRUMENTS

All changes in the period to the fair value of the financial liabilities are attributable to changes in the related credit risk.

*All financial liabilities at fair value through profit and loss were designated as such upon initial recognition.

All changes in the period to the fair value of the financial assets are attributable to changes in related credit risk.

(1) Financial assets at fair value through profit and loss were classified as held for trading in accordance with IAS 39.

(2) Financial assets at fair value through profit and loss were designated as such upon initial recognition.

The RBZ Forex Bond is valued at cost as there is currently no market information to facilitate application of fair value principles.

12.4 Financial assets at fair value through profit and loss

13. CASH AND CASH EQUIVALENTS

The statutory reserve balance with the Reserve Bank of Zimbabwe is non-interest bearing.

The balance was determined on the basis of deposits held and is not available to the Bank for daily use. The current year amount is shown under "other accounts" in Note 14.

 14.1 Total loans, advances and other accounts

14.2 Sectoral analysis of utilizations

The material concentration of loans and advances are in the industrial sector at 59% (2009 - 64%).

14.3 Allowance for impairment losses on loans and advances

14.4 Non-performing loans and advances

The residue on these accounts, where applicable, represents recoverable portions covered by realisable security.

15. PROPERTY AND EQUIPMENT

The land and buildings were valued by professional valuers as at 31 December 2010 for year end purposes and the open market value was US$2.415 million. The deemed balances at 1 January 2009 were derived using the principles outlined in note 2.1.

16. CAPITAL COMMITMENTS