Half Yearly Report

31st Aug 2011 07:00



NMBZ HOLDINGS LIMITED

CONSOLIDATED STATEMENT OF CASH FLOWS

for the six months ended 30 June 2011

 

 

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2011

 

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 16 August 2011.

 

2.1 Basis of preparation

 

As at 31 December 2010, the Group resumed 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 previous 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 a statement of financial position, a statement of comprehensive income, changes in equity and cash flows. The comparative statement of comprehensive income is for six months, and the comparative statements of 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 judgements

 

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 bonds.

 

2.7.5 Impairment losses on loans and advances

 

The Bank reviews all 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. The Directors believe that 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 are measured 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. 4. INTEREST INCOME

5. non-interest income

6. Operating EXPENDITURE

7. taxation

 Income tax expense

 

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.

  

8.3 Regulatory Guidelines and International Financial Reporting Standards Requirements

 

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. COMPONENTS OF OTHER COMPREHENSIVE INCOME

 

10. 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.

 

10.1 Earnings/ (losses)

10.2 Number of shares

 

10.3 Earnings/ (losses) per share (US cents)

10.4 Headline earnings/(losses)

 

 

11. 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 30 June 2010, 9 104 000 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.

 

11.3 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 in 2010 for a consideration of US$9 012.

 

 

12. DepositS and other accounts

 

\* The above are all financial liabilities at fair value through profit and loss designated as such upon initial recognition. The fair value of the above is the same as the cost. The deposits are payable on demand, have variable interest rates and varying security.

12.2 Maturity analysis

 

13. 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 fair value principles.

 

13.3 Financial liabilities at fair value through

profit and loss

13.4 Financial assets at fair value through profit and loss

14. 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 15.

 

15. LOANS, ADVANCES AND OTHER ACCOUNTS

 

15.1 Total loans, advances and other accounts

15.2 Sectoral analysis of utilisations

 

 

The material concentration of loans and advances are in the industrial sector at 33% (2010 - 50%).

 

15.3 Allowance for impairment losses on loans and advances

 

15.4 Non-performing loans and advances

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

  

16. PROPERTY AND EQUIPMENT

 

 

The land and buildings were valued by professional valuers as at 30 June 2011 for half year end purposes and the open market value was US$2 680 000.

 

17. CAPITAL COMMITMENTS

 

 

The capital expenditure will be funded from internal resources.

 

18. CONTINGENT LIABILITIES

	30 June	31 December
	2011	2010
	US$	US$
Guarantees	2 395 431	5 002 123
Commitments to lend	16 319 202	13 417 179
	-------------------	-----------------
	18 714 633	18 419 302
	===========	==========

19. PRIOR PERIOD RESTATEMENT

 

The restatement arose as a result of the treatment of the excess allowance for impairment on loans and advances resulting from the difference between the IAS 39 and the Regulatory allowance for impairment on loans and advances. In June 2010, these were accounted for under other comprehensive income and in 2011, these were recognized directly in equity as a transfer from retained earnings to a regulatory reserve. The effect of this change on the June 2010 results is summarized below. There is no effect in 2011.

 

Consolidated Statement Of Comprehensive Income

Consolidated Statement Of Financial Position

 

 

20. INVESTMENT IN ASSOCIATE

 

The Group has a 25% interest in African Century Limited, which is involved in the provision of lease finance.

 

African Century Limited is a company that is not listed on any public exchange. The following table illustrates summarized unaudited financial information of the Group's investment in African Century Limited.

 

Share of the associate's statement of financial position:

 

21. EXCHANGE RATES

 

The following exchange rates have been used to translate the foreign currency balances to United States dollars at period end:-

		Mid-rate	Mid-rate
		30 June 2011	31 December 2010
		US$	US$
British Pound Sterling	GBP	1.6058	1.5442
South African Rand	ZAR	6.7659	6.6249
European Euro	EUR	1.4516	1.3305
Botswana Pula	BWP	6.5402	6.4570

   

NMB BANK LIMITED

STATEMENT OF COMPREHENSIVE INCOME

for the six months ended 30 June 2011

 

*Certain amounts shown here do not correspond to the 2010 interim financial statements and reflect adjustments made as detailed in note 19.

 

  

NMB BANK LIMITED

STATEMENT OF FINANCIAL POSITION

as at 30 June 2011

NMB BANK LIMITED

STATEMENT OF CHANGES IN EQUITY

for the six months ended 30 June 2011

NMB BANK LIMITED

STATEMENT OF CASH FLOWS

for the six months ended 30 June 2011

 

 

 

 

NMB BANK LIMITED

NOTES TO THE FINANCIAL STATEMENTS

for the six months ended 30 June 2011

 

NOTES TO THE FINANCIAL STATEMENTS

There are no material differences between the Bank and the Holding company as the Bank is the principal operating subsidiary of the Group. The notes to the financial statements under NMBZ Holdings Limited are therefore the same as those of the Bank in every material respect.

 

a. NON-INTEREST income

b. Operating EXPENDITURE

c. COMPONENTS OF OTHER COMPREHENSIVE INCOME

d. EARNINGS PER SHARE

The calculation of earnings per share is based on the following figures:

d.1 Earnings/ (losses)

 

d.2 Number of shares

 

 

d.3 Earnings/ (losses) per share (US cents)

 

 

d.4 Headline earnings/(losses)

The adjustments are as follows:

  

e. SHARE CAPITAL

 

e.1 Authorised

The authorised ordinary share capital at 30 June 2011 is at the historical cost figure of US$25 000 (2010 - US$25 000) comprising 25 million ordinary shares of US$0.001 each.

 

e.2 Issued and fully paid

The issued share capital at 30 June 2011 is at the historical cost figure of US$16 501 (2010 - US$16 501) comprising 16.501 million ordinary shares of US$0.001 each

 

f. 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" under "Advances and other accounts".

 

g. INVESTMENT PROPERTIES

Rental income amounting to US$3 840 was received and no operating expenses were incurred on the investment properties in the current period.

 

The investment properties comprise two (2) sets of properties namely, the property along Borrowdale Road and various other properties. The property along Borrowdale Road is also known as Stand Number 19207 Harare Township of Stand 19206 and measures 4.4506 hectares in extent. The property was valued for half year end purposes by professional valuers and the open market value was US$1 920 000.

 

The other properties comprise residential stands and houses and these were valued by the professional valuers for half year end purposes and the open market value was US$477 500.

 

  

h. CORPORATE GOVERNANCE AND RISK MANAGEMENT

 

1. RESPONSIBILITY

 

These financial statements are the responsibility of the directors. This responsibility includes the setting up of internal control and risk management processes, which are monitored independently. The information contained in these financial statements has been prepared on the going concern basis and is in accordance with the provisions of the Companies Act (Chapter 24:03), the Banking Act (Chapter 24:20) and International Financial Reporting Standards.

 

2. CORPORATE GOVERNANCE

 

The Group adheres to principles of corporate governance derived from the King II Report, the United Kingdom Combined Code and RBZ corporate governance guidelines. The Group is cognisant of its duty to conduct business with due care and in good faith in order to safeguard all stakeholders' interests.

 

3. BOARD OF DIRECTORS

 

Board appointments are made to ensure a variety of skills and expertise on the Board. Non-executive directors are of such calibre as to provide independence to the Board. The Chairman of the Board is an independent non-executive director. The Board is supported by mandatory committees in executing its responsibilities. The Board meets at least quarterly to assess risk, review performance and provide guidance to management on both operational and policy issues.

 

The Board conducts an annual peer based evaluation on the effectiveness of its activities. The process involves the members evaluating each other collectively as a board and individually as members. The evaluation, as prescribed by the RBZ, takes into account the structure of the board, effectiveness of committees, strategic leadership, corporate social responsibility, attendance and participation of members and weaknesses noted. Remedial plans are invoked to address identified weaknesses with a view to continually improve the performance and effectiveness of the Board and its members.

 

3.1 Directors' attendance at NMB Bank Limited Board meetings

 

3.1.1 Board of Directors 

 

  

3.1.2 Audit Committee

 

 

3.1.3 Risk Management Committee

 

 

* Mr F Zimuto became a member of the Committee with effect from 4 March 2011.

 

3.1.4 Asset and Liability Management Committee (ALCO), Finance & Strategy Committee

 

 *Mr F Zimuto became a member of the Committee with effect from 4 March 2011.

 

3.1.5 Loans Review Committee

 

 

 

3.1.6 Human Resources & Remuneration Committee

 

 

 *Mr F Zimuto became a member of the Committee with effect from 4 March 2011.

  

4. RISK MANAGEMENT

 

In the ordinary course of business the Bank manages risks of all forms. The risks are identified and monitored through various channels and mechanisms.

 

The Board of Directors has overall responsibility for the establishment and oversight of the Bank's risk management framework. The Board has established the Asset and Liability Management Committee (ALCO) and Risk Committee, which are responsible for developing and monitoring Bank risk management policies in their specified areas. The Bank has a Risk Management department, which reports to the Managing Director and is responsible for the management of the overall risk profile.

The Bank's risk management policies are established to identify and analyse the risks faced by the Bank, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered.

 

The Bank Risk Committee which is responsible for monitoring compliance with the Banks risk management policies and procedures, and for reviewing the adequacy of the risk management framework in relation to the risks faced by the Bank, is assisted in these functions by Internal Audit. Internal Audit undertakes both regular and ad-hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee and the Risk Committee.

 

The Bank's main objective is to contain the risk inherent within the financial services sector and to ensure that the Bank's various risk profiles are understood and appropriately managed to the benefit of customers, shareholders and other stakeholders.

 

4.1 Credit risk

 

Credit risk is the risk that a financial contract will not be honored according to the original set of terms. The risk arises when borrowers or counterparties to a financial instrument fail to meet their contractual obligations. The Board has put in place sanctioning committees which operate according to the amount requested by an applicant. The Credit Risk Management department reviews all applications. This initial review allows only those applications that do not unduly expose the Bank to credit risk to be considered by the sanctioning committees.

 

4.1.1 Management of credit risk

 

The Board has delegated responsibility for the management of credit risk to its Loans Review Committee. The Credit Risk Management department which also reports to the Loan Review Committee is responsible for oversight of the Bank's credit risk, including:

 

·; Formulating credit policies in consultation with business units, covering collateral requirements, credit assessment, risk grading and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements

·; Establishing the authorization structure for the approval and renewal of credit facilities. Facilities require authorization by Head of Credit Risk, Executive directors, Board Credit Committee or the Board of Directors depending on amount as per set limits.

·; The Credit Risk department assesses all Credit exposures in excess of designated limits, prior to facilities being committed to clients by the business unit concerned. Renewals and reviews of facilities are subject to the same review process.

·; Limiting concentrations of exposure to counter parties and industry for loans and advances.

·; Maintaining and monitoring the risk gradings as per the RBZ requirement in order to categorise exposures according to the degree of risk of financial loss faced and to focus management on the attendant risks. 

·; The current risk grading framework consists of five grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation.

·; Reviewing compliance of business units with agreed exposure limits, including those for selected industries.

·; Providing advice, guidance and specialist skills to business units to promote best practice throughout the Bank in the management of credit risk.

 

4.2 Market risk

 

This arises from adverse movements in the market place, which occur in the money market (interest rate risk), foreign exchange and equity markets in which the Bank operates. The Bank is currently developing VaR (Value at Risk) model which will be used to manage and monitor the market risk for the trading portfolio.

 

The Bank has in place an Asset and Liability Management Committee (ALCO), which comprises the departmental heads of Risk, Treasury, Corporate and Retail banking and Finance, in addition to executive directors. The committee monitors these risks and recommends the appropriate levels to which the Bank should be exposed at any time. The approval of all dealing limits ultimately rests with this committee.

 

The market risk for the non - trading portfolio is managed by monitoring the sensitivity of Bank's financial assets and liabilities to various interest rate scenarios. The bank monitors its Net Interest Margin as a primary measure of interest rate conditions. On foreign exchange risk, the bank monitors currency mismatches and make adjustments depending on exchange rate movement forecast. The mismatches are also contained within 10% of the bank's capital position.

 

4.3 Liquidity risk

 

Liquidity risk is the risk that operations cannot be funded and financial commitments cannot be met timeously. The risk arises when there is a maturity mismatch between assets and liabilities. The Bank identifies this risk through maturity profiling of assets and liabilities and assessment of expected cashflows and the availability of collateral which could be used additional funding if required.

 

The Bank maintains a portfolio of marketable assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Bank maintains a statutory deposit with the Central Bank which was accumulated since dollarisation at stipulated rates. During 2010, the Reserve Bank of Zimbabwe discontinued the payment of statutory reserves and the amounts accumulated to date had not been refunded by 30 June 2011. The daily liquidity position is monitored and regular liquidity stress testing is conducted under a variety of scenarios covering both normal and more severe market conditions. All liquidity policies and procedures are subject to review and approval by ALCO.

 

The key measure used by the Bank for managing liquidity risk is the ratio of net liquid assets to deposits to customers. The Bank monitors its liquidity ratio in compliance with Banking Regulations to ensure that it is not less than 20% of the liabilities to the public. Liquid assets consist of cash and cash equivalents, short term bank deposits and liquid investment securities available for immediate sale.

 

4.4 Operational risk

 

This risk is inherent in all business activities and is the potential for loss arising from ineffective internal controls, poor operational procedures to support these controls, errors and deliberate acts of fraud. The mitigation of the risk and the cost incurred to reduce the risk is critical. The bank utilizes monthly Key Risk Indicators to monitor operational risk in all units. Further to this, the bank has an elaborate Incident Reporting Policy in which all incidents with a material impact on the well-being of the bank are reported to risk management. The Board has a Risk Committee whose function is to ensure that this risk is minimised. The Risk Committee through the Internal Audit function and the Risk Management department assesses the adequacy of the internal controls and makes the necessary recommendations to the Board.

  

4.5 Legal and compliance risk

 

Legal risk is risk from uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws or regulations. Legal risk may entail such issues as contract formation, capacity and contract frustration. Compliance risk is the risk arising from non - compliance with laws and regulations.

 

To manage this risk the Bank employs a legal practitioner who is responsible for the drafting, monitoring and executing all contracts. Permanent relationships are also maintained with firms of legal practitioners and access to legal advice is readily available to all departments. The compliance function is responsible for identifying and monitoring legal and compliance risks and ensuring that the Bank remains in compliance with all regulatory requirements.

 

4.6 Reputational risk

 

Reputational risk is the risk of loss of business as a result of negative publicity or negative perceptions by the market with regards to the way the Bank conducts its business.

 

To manage this risk, the Bank strictly monitors customers' complaints, continuously train staff at all levels, conducts market surveys and periodic reviews of business practices through its Internal Audit department.

 

4.7 Strategic risk

This refers to current and prospective impact on the bank's earnings and capital arising from adverse business decisions or implementing strategies that are not consistent with the internal and external environment. To manage this risk, the bank is guided by a strategic plan that is set out by the board of directors. The attainment of strategic objectives by the various departments is monitored periodically at management level. There is an ALCO, Finance and Strategy Committee at board level responsible for monitoring overall progress towards attaining strategic objectives for the bank.

 

The directors are satisfied with the risk management processes in the Bank as these have contributed to the minimisation of losses arising from risky exposures.

 

4.8 Regulatory Compliance

 

 There were no instances of regulatory non-compliance in the period under review. The Group remains committed to complying with and adhering to all regulatory requirements.

  

4.9 Capital Management

The primary objective of the Bank's capital management is to ensure that the Bank complies with the RBZ requirements. In implementing the current capital requirements, the RBZ requires the Bank to maintain a prescribed ratio of total capital to total risk weighted assets.

Regulatory capital consists of Tier 1 capital, which comprises share capital, share premium, retained earnings (including current year profit), statutory reserve and other equity reserves.

The other component of regulatory capital is Tier 2 capital, which includes subordinated term debt, revaluation reserves and portfolio provisions.

 

Tier 3 capital relates to an allocation of capital to market and operational risk.

 

Various limits are applied to elements of the capital base. The core capital (Tier 1) shall comprise not less than 50% of the capital base and portfolio provisions are limited to 1.25% of total risk weighted assets.

 

The Bank's regulatory capital position at 30 June 2011 was as follows:

 

  

5. SEGMENT INFORMATION

 

For management purposes, the Bank is organised into four operating segments based on products and services as follows:

Retail Banking - Individual customers deposits and consumer loans, overdrafts, credit card facilities and funds transfer facilities.

Corporate Banking - Loans and other credit facilities and deposit and current accounts for corporate and institutional customers.

Treasury - Money market investment, securities trading, accepting and discounting of instruments and foreign currency trading.

International Banking - Handles the Bank's foreign currency denominated banking business and manages relationships with correspondent banks

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss which in certain respects is measured differently from operating profit or loss in the financial statements. Income taxes are managed on a Bankwide basis and are not allocated to operating segments.

 

 Interest income is reported net as management primarily relies on net interest revenue as a performance measure, not the gross income and expense.

 

Transfer prices between operating segments are on arm's length basis in a manner similar to transactions with third parties.No revenue from transactions with a single external customer or counterparty amounted to 10% or more of the Bank's total revenue in 2011 and 2010.

 

 5. SEGMENT INFORMATION

 

The following table presents income and profit and certain asset and liability information regarding the bank's operating segments and service units:

For the six months ended 30 June 2011

 

	Retail	Corporate		International
	Banking	Banking	Treasury	Banking	Unallocated	Total
	US$	US$	US$	US$	US$	US$
Income
Third party	5 633 400	8 539 391	1 305 348	574 408	(104 580)	15 947 967
Inter - segment	-	-	-	-	-	-
	----------	-------------	-----------	-----------	------------	--------------
Total operating income	5 633 400	8 539 391	1 305 348	574 408	(104 580)	15 947 967
Impairment losses on loans and advances	(218 726)	(1 127 337)	-	-	-	(1 346 063)
	------------	--------------	-----------	---------	------------	--------------
Net operating income	5 414 674	7 412 054	1 305 348	574 408	(104 580)	14 601 904
	------------	--------------	------------	----------	-----------	---------------
Results
Interest and similar income	1 859 651	6 621 780	820 517	-	-	9 301 948
Interest and similar expense	(851 887)	(2 855 342)	-	-	-	(3 707 229)
	------------	-------------	-------------	------------	------------	-------------
Net interest income	1 007 764	3 766 438	820 517	-	-	5 594 719
	-------------	--------------	-------------	------------	---------	-------------
Fee and commission income	3 773 749	1 917 610	(18 696)	574 408	-	6 247 071
Fee and commission expense	-	-	-	-	-	-
	-------------	------------	------------	-----------	------------	-------------
Net fees and commission income	3 773 749	1 917 610	(18 696)	574 408	-	6 247 071
	-------------	------------	------------	-----------	-----------	-------------
Depreciation of property and equipment	125 875	15 038	6 323	5 363	103 407	256 006
Segment profit/ (loss)	1 666 371	2 955 815	1 296 736	185 154	(3 490 417)	2 613 659
Income tax expense	-	-	-	-	-	(723 521)
	-------------	-------------	------------	------------	---------------	-------------
Profit/(loss) for the year	1 666 371	2 955 815	1 296 736	185 154	(3 490 417)	1 890 138
	-------------	--------------	-------------	------------	--------------	-------------

 

 

ENDIR LLFFRTEIEFIL

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