governance the zanaco case

By Ignatius Mwanza Livingstone, April 2010

A PRESENTATION TO THE ZICA ANNUAL GENERAL MEETING

GOVERNANCE; THE ZANACO CASE

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Contents

Environmental Background Pre-liberalization Post Liberalization New Law

Zanaco Background Governance Pre-privatization Governance – Post privatization

Impact of Governance on Financial Performance Conclusion

Environmental Background

Environment – Pre-Liberalisation

1964-1990 Pre-Liberalisation– Zanaco was the biggest Zambian Bank – Dominated by subsidiaries of international banks, – International banks subject to strict supervision of central banks in home countries– Parent companies with deep pockets to provide additional funding if in distress– Govt administrative controls ; interest and exchange controls

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Environment ; Post Liberalisation

Early 1990s– Exchange Controls suspended & interest rates liberalised– Depreciating ZMK, high interest rates, high inflation– Minimum capital requirement K20m– Proliferation of commercial banks; 12 to 24– Under capitalised in real terms– Gained from investing in Govt Securities at very yields

– T

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Environment – Management & Governance Post Lib’

Interest and exchange rates stabilised Inexperienced to manage risk in a liberalised environment Weak corporate governance practices Poor underwriting standards Poor lending decisions Concentration risk Insider borrowing No capacity to absorb loan losses Law was weak to support Bank of Zambia action No legal framework to allow BOZ to scrutinize appointment of key management staff

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Environment - New Law

Banking & Financial Services Act (1994), Amended (2000) BOZ empowered to take swiftly deal with erring institutions and take corrective

measures Limits loans to single customer to 25% of capital Limits insider borrowing and must be reported to BOZ Updating regulatory and supervisory structures for banks Risk based approach to bank supervision Enhanced Early Warning System Recruited skilled and competent staff & continuous training Resulted in stable financial markets

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Zanaco Overview

Zanaco overview: the “People’s Bank”

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Originally formed by the GRZ in 1969 (as National Commercial Bank Limited) to operate as a state

owned enterprise

Registered commercial bank whose principal activity is to provide banking and financial services

Merged with Commercial Bank Zambia (CBZ) limited in 1976, resulting in changing of names to

Zambia National Commercial Bank Limited (“Zanaco”)

Top tier bank in Zambia in terms of deposits, assets, loans and advances and branch network

In 1999 Zanaco was tranched for privatisation

Partially privatized in April 2007, when Rabobank acquired 49% of the Government of the Republic

of Zambia’s (GRZ) interest in Zanaco

Privatization and the entry of Rabobank provided Zanaco with:

Management and technical support for strategic direction

Cement position as a broad based retail bank with rural presence

Opportunity to improve operational and financial efficiency

Zanaco overview: the “People’s Bank” (Cont’d)

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In November 2008, the final stage of the partial privatization was completed by Zambia

Privatization Trust Fund (ZPTF), acting on behalf of GRZ, offering for sale 25.8% shares to the

Public through an IPO

Zanaco simultaneously raised new capital through an Offer for Subscription of 170,625,000

ordinary shares

The ownership structure post IPO is:

−45.6% Rabobank

−25% GRZ

−24.7% Public

−3.4% ZNFU

−1.3% ESOP

Governance

Zanaco : Corporate Governance – Pre-privatisation

99.98% shares were held the Government of Zambia 0.02% where in the hands minority shareholders mainly individuals The power of appointing the Board of Director was vested in the Minister of Finance Not all board member possesses appropriate skills and knowledge to govern a bank Arms length dealing was difficult especially with major shareholder Board of Directors oversight was difficult

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Zanaco Overview: Corporate Governance Post Pvt

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Zanaco adheres to a stringent corporate governance regime.

Adherence to the highest corporate governance practice is driven by both statutory compliance

regulations as well as self propelled in order to exceed our stakeholder expectations

Integrity & transparency in our dealings with all our stakeholders anchor & govern our

relationships

The bank subscribes and fully complies with the following regulatory agencies; The Banking & Financial Services Act Bank of Zambia Corporate Governance Guidelines The Zambian Companies Act The Securities Act The Anti-Money Laundering Act LuSE Corporate Governance Code & LuSE listing rules And off course our own Zanaco Corporate Governance Charter

Zanaco Overview: Corporate Governance (cont’d)

Board of Directors are in full & effective control of the Bank.

Policies, direction, strategies, investment & divestment decisions are all driven by the board

The role of Chairman & CEO are NOT vested in one person

Directors are scrutinised & subjected to a BoZ fit & proper test

Directors are also subjected to final approval by shareholders at the AGM

5 Non Executive Directors, 1 Executive Director−A.J.A.M. Kuijpers (Chairman)−C.Y. Mulendema (V. chairman)−B. Dick (nominated)−G.M. Akapelwa-Ehueni−G.N.H. Robinson−F Weenig−M.H. Wiessing, (CEO)

Directors are nominated by the shareholders at the Annual General Meeting (AGM) as per Articles

of Association

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RISK MANAGEMENT & INTERNAL CONTROL

The buck stops with the board which accepts final responsibility for risk mgt & internal control systems of the bank.

On an on-going basis, the board must provide reasonable assurance regarding: Effectiveness & efficiency of operations Safeguarding of the bank’s assets (including information) Compliance with applicable laws, regulations & supervisory requirements Reliability of accounting records Business sustainability under normal as well as adverse conditions; and Responsible behavior towards all stakeholders

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BOARD COMMITTEES

Audit & Risk Committee – Chaired by NED, & attended by 2 other NED’s & CEO. Meets * 4 per yr Loans Review Committee – Chaired by NED, & Attended by 2 other NED’s & CEO. Meets Quarterly Credit Committee – Chaired by NED, Attended by 2 other NED’s & CEO. Meets Quarterly. Certain

members of EXCO may attend by invitation. Human Resources & Compensation Committee – Chaired by NED. (This is a new committee)

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Zanaco is committed to good corporate governance and is fully devoted to the principles of accountability, integrity and transparency

The Directors are committed to ensuring that the Company complies with the major principles of modern corporate governance and best practice

The Board has established 4 committees to enable it to properly discharge its duties and responsibilities and effectively fulfill its decision making process:

AUDIT COMMITTEE CREDIT COMMITTEE LOANS REVIEW COMMITTEE HR COMMITTEE

Assist the Board in financial

reporting, compliance,

and effectiveness of internal

control environment Ensure existence of appropriate

internal controls Review investments and material

transactions Review of annual financial

statements Liaise with external and internal

auditors Ensure compliance with BFSA

regulations

Ensure limitation of risks through adequate diversification of credit portfolio Manage credit risk through policies on concentration and large risk exposures Ensure proper asset classification and adequate loan provisioning Approve the general credit procedures of the Company Approve individual credit exposures for amounts above those delegated to management

Review loan reports from

management Review loans portfolio to identify

risk and ensure

adequacy of the allowance for

loan losses account Ensure compliance to Statutory

Instrument No. 142

issued pursuant to the BFSA

Review conditions of serviceEnsure compensation and benefits

are competitive Ensure effective steps are taken

towards employee satisfaction


CODE OF CONDUCT

Both Retail & Corporate divisions are guided by a code of conduct which stipulates the standards by which individuals within the bank are judged. The objectives of the code are: Integrity Skill, care & diligence Staff interest & gifts Customer due diligence/know your customer Conduct of business/communication with customers Conduct of business/conflict of interest Duty to supervise

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EXTERNAL AUDIT

External auditors report on whether the financial statements are fairly are fairly presented in accordance with IFRS & in the manner required by the Zambian Companies Act

INTERNAL AUDIT

Internal Audit is an independent, objective assurance & consulting activity designed to add value to the bank & improve risk management, control & governance processes.

Internal audit plans cover matters identified in risk management assessments as well as issues highlighted by the Board, the Audit & Risk Committee, executive & senior management

Administratively reports to MD on day-to-day matters, but reports directly to the Chairman of the Audit Committee on a regular basis.

COMPLIANCE FUNCTION

An independent function guided by the Compliance Charter. The Board is responsible for formally approving the Compliance Policy set by Executive

Management. Efficiency of implementation of the policy is evaluated on a quarterly basis by means of a status

report provided by Executive Mgt to the board The Compliance Function & Compliance Monitoring program are subject to independent review by

both internal & external audit for appropriateness of the policies & implementation

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ANTI-MONEY LAUNDERING POLICY

The bank has enhanced its AML procedures by gaining access to an internationally reported database for people and entities who are reported to be involved in money laundering activities

Staff training is on-going

WHISTLE BLOWING

Intended to make it easier for staff, consultants, & other service providers to report irregularities in good faith without having to fear that the actions may have adverse consequences on them.

This is a key element in demonstrating the bank’s commitment to the highest possible standard of transparency, integrity, probity & accountability in its operation with stakeholders.

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Zanaco Overview: Related Parties

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In the ordinary course of business, Zanaco may trade with shareholders considered related parties;

transactions are at arms length

Transactions include;

− Instruments in securities

−Placements

−Account services

A management services agreement was signed at the time of privatisation; this agreement was

entered into between Rabobank, GRZ, as well as Zanaco itself; on expiry it will be reviewed,

subject to Board approval

Impact of Good Governance on Financial Performance

Prudential accounts comparables (2009 vs 2006)

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2009 Zanaco Barclays Stanbic Stanchart Finance MktAssets ZKw bn 2,951 3,512 2,400 2,979 1,509 18,398LDR 47% 89% 49% 41% 69% 54%C/I 58% 51% 66% 55% 43% 56%Provisions (ZKw Bn) 43 364 28 16 6 484CAR 21% 14% 18% 22% 21% 18%

Capital (ZKw Bn) 305 151 190 237 206 1,865

2006 Zanaco Barclays Stanbic Stanchart Finance MktAssets ZKw bn 1,677 1,901 1,445 1,807 1,819 10,675LDR 32% 72% 54% 46% 60% 46%C/I 78.0% 54.4% 48.8% 50.6% 53.5% 56%

Provisions (ZKw Bn) 31 109 11 13 1 182CAR 15% 11% 22% 18% 14% 20%

Capital (ZKw Bn) 101 148 173 162 98 1,080

Strong financial growth- 4 years IFRS accounts

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(K’ billion) Actual ‘06 Actual ’07 Actual ‘08 Actual ‘09 Change '08/'09Revenues 242 299 399 497 25%Operating expenses 183 234 281 305 9%PBT 59 45 86 129 50%Impairment 19 19 32 66 106%Tax charge/ (credit) 11 -5 34 47 38%

PAT 29 51 52 79 52%Deposits 1,494 1,799 2,325 2,292 -1%Assets 1,706 2,124 2,915 3,042 4%L & A (net) 487 800 1,001 1,163 16%Equity 159 202 322 398 24%Operational C/ I 76% 78% 70% 56% -20%Operational less once off (C/ I) 76% 74% 68% 58% -15%Dividend/share in ZKw 10.17 10.17 15.75 21EPS in ZKw 29.63 51.53 52.09 70.94 36%ROA 2% 2% 2% 3% 30%ROE 18% 25% 16% 20% 24%Prudential Provisions in ZKw 31 48 31 43 39%

Comments - 4 years IFRS accounts (cont’d)

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Consistent revenues growth; >25% pa since 2007 Operating costs under control & in the right direction PAT growing faster; >40% (save for 2007/08-impact of tax paying) Impairments still high but Non-Performing Loan ratio trending downwards Cost/Income ratio within Medium Term Plan target 16% Loans & Advances growth despite general economic slowdown; 2009 exceptional year due to

crisis Strong equity position

Share trading performance

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Share price;

−Listing K 470

−Current K 545

−Highest K 550

−Lowest K 200

Low trading volumes & value ;

−Av monthly; 590,000 shares

−Av Monthly value; K 310 million

Share price performance above LASI

Dividends and dividend policy

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Kwacha millions2009

(proposed)2008 2007 2006 2005

Dividends paid 24,255 18,191 10,001 10,001 10,007

The table below shows the dividend Zanaco has declared and paid out in the last 4 financial years

Following the listing on the LuSE, the Company has followed a policy of declaring dividends as the

Directors may deem prudent from time to time Over the next few years, Zanaco will continue retaining a significant part of its earnings to allow

the further investments in the ongoing restructuring, and growth ambitions of the business.

Despite this, Zanaco will continue to increase its dividend pay-out ratio in line with performance Dividend per share;

−Proposed for 2009 K 21.00

−Paid for 2008 K 15.75 33% dividend growth Dividend yield;

– 4% on current price of K 515

Conclusion

Overall performance 2009

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Good governance practices have led to; - BOZ stabilization of financial markets - Zanaco’s strong financial performance

THANK YOU