20 18 NMBZ HOLDINGS LIMITED Annual Report Holding Company of 1 CONTENTS 2 Annual Report 2018 FINANCIAL SUMMARY Total income (US$) Operating profit before impairment charge (US$) Total comprehensive income (US$) Basic earnings per share (US cents) Dividend per share (US cents) Total deposits (US$) Total gross loans and advances (US$) Total shareholders’ funds and shareholders’ liabilities (US$) Enquiries: NMBZ HOLDINGS LIMITED 31 December 2018 31 December 2017 74 740 671 31 155 227 21 267 632 5.43 0.96 434 957 949 262 335 026 79 962 313 53 606 281 16 870 839 10 029 136 2.58 0.36 348 956 385 211 005 418 65 651 843 Benefit Peter Washaya, Chief Executive Officer, NMBZ Holdings Limited benefitw@nmbz.co.zw Benson Ndachena, Chief Finance Officer, NMBZ Holdings Limited bensonn@nmbz.co.zw Website: Email: Telephone: http://www.nmbz.co.zw enquiries@nmbz.co.zw Tel: +263-242-759 651/9 3 GROUP PROFILE The NMBZ Holdings Limited Group (the Group) comprises the company (NMBZ Holdings Limited) and the wholly owned banking subsidiary, NMB Bank Limited (the Bank). The Bank was established in 1993 as a merchant bank incorporated under the Companies Act (Chapter 24:03) of Zimbabwe and is now registered as a commercial bank in terms of the Banking Act (Chapter 24:20) of Zimbabwe. It operates through a branch network in Harare, Bulawayo, Masvingo, Kwekwe, Mutare, Gweru, Bindura, Chitungwiza and Chinhoyi. The Bank’s branch network is constantly growing to service customers and meet demands in suitable and convenient locations. Set out below are the Bank’s branch locations: Avondale - 20 King George Road, Avondale, Harare Bindura – Mwatuka Complex, Bindura Borrowdale - Shops 37 & 38, Sam Levy’s Village, Borrowdale, Harare Borrowdale Excellence Centre - Block 3 Suite F, Sam Levy Village, Borrowdale, Harare Bulawayo - NMB Centre, Corner George Silundika Street/Leopold Takawira Street, Bulawayo Chinhoyi – 469 Magamba Way, Chinhoyi Chitungwiza – Chitungwiza Town Centre Eastgate - Shop 24, Eastgate Mall, Corner Sam Nujoma Street/Robert Mugabe Road, Harare Gweru - 36 Robert Mugabe Road, Gweru Head Office - Unity Court, Corner Kwame Nkrumah Avenue/First Street, Harare Joina City - Shop 105A, First floor, Joina City Corner Jason Moyo / Innez Terrace, Harare Kwekwe - 57A Robert Mugabe Way, Kwekwe Masvingo - Stand no. 377 Robert Mugabe Way, Masvingo Msasa -77 Amby Drive, Harare Mutare - Embassy Building, Corner Aerodrome Road/Second Street, Mutare Southerton - 7 - 9 Plymouth Road, Harare The Bank’s Automated Teller Machine (ATM) network, covers the following locations: • Avondale - Harare • Borrowdale - Harare • Bulawayo • Card Centre - Harare • Chinhoyi • Chitungwiza Town Centre • Eastgate - Harare • Fruit & Veg - Greendale, Harare • Gweru • Joina City - Harare • Kwekwe • Masvingo • Msasa - Harare • Mutare • Southerton - Harare 4 Annual Report 2018 CHAIRMAN’S STATEMENT Mr INTRODUCTION The Group has continued in the pursuit of its short and medium term goals and the accompanying results are testimony to the considerable progress towards our stated strategy. The financial results continue to be largely driven by the Bank’s continued diversification into the broader market segments, enhanced use of the bank’s digital offerings, stricter credit underwriting standards and containment of non-performing loans. The bank witnessed a slowdown in business activity during the last quarter of 2018 as businesses adjusted to the new policy measures outlined in the Transitional Stabilisation Programme presented in August 2018 soon after the national elections. Notwithstanding the slowdown, the group’s financial performance was well above prior year. The key financial highlights of the Group as at 31 December 2018 are depicted below: 600,000 500,000 400,000 300,000 200,000 100,000 Total assets (US$000’s) 527,068 422,564 % 5 2 Shareholders’ funds and Shareholders’ liabilities (US$000’s) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 79,962 65,652 % 2 2 2017 2018 2017 2018 Total comprehensive income (US$000’s) Basic earnings per share (EPS) (US cents) 21,268 25,000 20,000 15,000 10,000 5,000 10,029 % 2 1 1 6.00 5.00 4.00 3.00 2.00 1.00 5.43 2.58 % 0 1 1 2017 2018 2017 2018 GROUP RESULTS Financial performance The profit before taxation was US$27 143 275 (2017 – US$13 017 690) during the period under review and this gave rise to total comprehensive income of US$21 267 632 (2017 – US$10 029 136). The Group achieved a basic earnings per share of 5.43 cents (2017 - 2.58 cents). Operating expenses amounted to US$34 720 428 and these were up 26% from a prior year amount of US$27 578 347. The increase in operating expenses was due to increased transaction processing and operational costs arising from the Bank’s digital drive, continued expansion into the broader market segments and general inflationary pressures largely driven by foreign currency shortages. Impairment losses on financial assets measured at amortised cost amounted to US$4 011 952 for the current period from a prior year amount of US$3 853 149 and the increase was mainly due to the adoption of IFRS 9 with effect from 1 January 2018. The bank has continued with its drive to reduce non-performing loans (NPLs) and the ratio stood at 7.43% as at 31 December 2018. This was lower than the 31 December 2017 ratio of 7.98%. The decrease in the NPL ratio was largely due to aggressive collections and stricter credit underwriting standards. Financial position The Group’s total assets increased by 25% from US$422 564 352 as at 31 December 2017 to US$527 067 596 as at 31 December 2018 mainly due to a 27% increase in investment securities, a 21% increase in loans, advances and other assets, a 10% increase in investment properties, an increase of 26% in cash and cash equivalents and a 143% increase in property and equipment. The bank continued with its intermediation role and support for the productive sectors as reflected by a 24% increase in gross loans and advances from US$211 005 418 as at 31 December 2017 to US$262 335 026 as at 31 December 2018. Investment securities (Treasury Bills and Bonds) increased by 27% from US$92 245 425 as at 31 December 2017 to US$117 249 434 as at 31 December 2018 mainly due to some purchases from both the primary and secondary bond markets. The bank has set maximum limits for investment securities to ensure most of our funds are channeled towards loans and advances. Total deposits increased by 25% from US$348 956 385 as at 31 December 2017 to US$434 957 949 as at 31 December 2018 as a result of strong deposit mobilisation strategies coupled with a significant improvement in market liquidity. The Bank’s liquidity ratio closed the period at 41.62% (2017 – 47.53%) and this was above the statutory requirement of 30%. Capital The banking subsidiary’s capital adequacy ratio stood at 23.25% as at 31 December 2018 (31 December 2017 - 24.26%). The ratio was well above the statutory minimum of 12%. Our capitalisation level is adequate to cover all risks and supports the underwriting of new business. The Group’s shareholders’ funds and shareholders’ liabilities have increased by 22% from US$65 651 843 as at 31 December 2017 to US$79 962 313 as at 31 December 2018 as a result of the current year’s total comprehensive income. The Bank’s regulatory capital as at 31 December 2018 was US$74 927 487 and is above the minimum required regulatory capital of US$25 million. Furthermore, the bank is on course to meet the required US$100 million capitalisation by 2020. FUNCTIONAL CURRENCY AND AUDIT OPINION Between 2014 and 2016, the Zimbabwean economy experienced a massive liquidity crisis which eventually 5 CHAIRMAN’S STATEMENT (Cont’d) FUNCTIONAL CURRENCY AND AUDIT OPINION (continued) prompted the Monetary Authorities to introduce the bond notes in November 2016 whilst encouraging the public to continue using the other currencies in the multi-currency basket. The bond notes were introduced at an official fixed exchange rate of 1:1 with the USD and the Monetary Authorities specifically directed financial institutions not to open separate vault and cash accounts for the USD and the bond notes. In October 2018, the Monetary Authorities instructed financial institutions to separate bond notes and USD accounts and indicated that corporates and individuals could proceed to open Nostro Foreign Currency Accounts (FCA), for foreign currency holdings, which were now being exclusively distinguished from the existing RTGS based accounts. However, it should be noted that at the time of this policy pronouncement, the Monetary Authorities did not state that they had introduced a new currency for Zimbabwe, which actually meant that the USD remained as the currency of reference. By 31 December 2018, there had been no pronouncement by the Monetary Authorities to the effect that there had been a new currency introduced, which could be considered as the country’s functional currency. On 22 February 2019, the Reserve Bank of Zimbabwe (RBZ) issued an Exchange Control Directive, RU 28 of 2019 which established an interbank foreign exchange market to formalise the buying and selling of foreign currency through the Banks and Bureaux de change. In order to establish an exchange rate between the current monetary balances and foreign currency, the Monetary Authorities denominated the existing RTGS balances in circulation as RTGS Dollars. Initial trades on 22 February 2019 were at USD1: RTGS$2.5. On the same date, Statutory Instrument 33 (SI 33) of 2019 was also issued and it specified that for accounting and other purposes, all assets and liabilities that were in USD immediately before the 22nd of February 2019 were deemed to have been valued in RTGS Dollars at a rate of US$1: RTGS$1. The fixed exchange rate of US$1: RTGS$1 for the period prior to the effective date of 22 February 2019 is not in compliance with IAS 21. In terms of IAS 21, foreign currency monetary items shall be translated using the closing rate, non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured. Foreign currency transactions shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. The Group used a fixed exchange rate of US$1: RTGS$1 for the year ended 31 December 2018 and thus did not comply with the requirements of International Accounting Standard 21 (IAS 21) “The Effects of Changes in Foreign Exchange Rates”, as doing so would have been in contravention of SI 33 of 2019. However, the Directors performed a sensitivity analysis on note 23.1 to illustrate the impact on the Group’s statement of financial position as at 31 December 2018 had the financial statements been restated using the first available interbank mid-rate on 22 February 2019 of USD1:RTGS$2.5. A further analysis of the impact on the statement of financial position has also been performed using the rates of USD1:RTGS$3 and USD1:RTGS$4. In light of the failure to fully comply with the requirements of IAS 21, the Group’s independent auditors, Ernst & Young, have issued an adverse opinion on the financial statements for the year ended 31 December 2018. DIVIDEND In view of the significantly improved financial performance recorded by the Group in the year under review and the sound capital ratio, the Board proposes to declare a final scrip dividend alternative to the cash dividend of 0.96 RTGS cents per share. The scrip dividend option was arrived at after taking into account shareholders’ expectations, value preservation and the need to ensure sustainable organic growth in view of the banking subsidiary’s regulatory capitalisation requirements. DIRECTORATE There were no changes to the directorate during the period under review. The directors of both NMBZ Holdings Limited and NMB Bank Limited boards remain as follows: Mr Benedict A. Chikwanha (Board Chairman), Mr Benefit P. Washaya (Chief Executive Officer), Mr Benson Ndachena (Chief Finance Officer), Mr Charles Chikaura (Independent Non-Executive Director), Mr Erik Sandersen (Non-Executive Director), Mr James de la Fargue (Non-Executive Director), Ms Jean Maguranyanga (Independent Non-Executive Director), Mr Julius Ticheelar (Non-Executive Director) and Ms Sabinah Chitehwe (Independent Non-Executive Director). Subsequent to year end, Mr Erik Sandersen resigned from the Board of NMBZ Holdings Limited and NMB Bank Limited on 24 January 2019. I would like to thank Erik for his contributions to NMBZ Holdings Limited, NMB Bank Limited and the Board over the years and wish him success in his new endeavours. CORPORATE SOCIAL INVESTMENTS During the period under review, the Group channeled its social investments efforts into the country’s educational system, enhancement of youth entrepreneurial skills through partnerships, support for the disadvantaged and vulnerable groups as well as environmental protection and conservation causes. The Group donated to the Glen View community following an outbreak of the cholera epidemic in September 2018. In addition to donations to social causes, donations were made to the Albino Trust of Zimbabwe, commemorations of World Kidney Day and to Friends of Dzikwa, a charity organisation which operates in the Dzivarasekwa community. In line with promotion of sports, the group partnered several schools in their sporting activities and the highlight of these were the ZiMwana Trust Street Athletics and Friends of Dzikwa Trust 16th Annual Sports Day for Orphans whose thrust was the promotion of an inclusive society through sports. Partnerships with groups and organisations that promote the conservation of the environment and wildlife were maintained during the period under review, with BirdLife Zimbabwe and Friends of Hwange being some of the partner organisations. CORPORATE DEVELOPMENTS In line with our strategy to reach the broader market segments, the Bank opened two service centres in Bindura and Chitungwiza in May 2018 and December 2018 respectively. We continue to establish representation in areas where the Bank is currently not represented and plans to open a service centre in Victoria Falls are at an advanced stage. The Group undertook the construction of its new Head Office along Borrowdale Road in April 2018 and the new building should be ready for occupation in the last quarter of 2019. The new Head Office reinforces the Group’s commitment to the country and its foreseeable future. 6 Annual Report 2018 CHAIRMAN’S STATEMENT (Cont’d) OUTLOOK AND STRATEGY In line with the Bank’s financial inclusion drive, we have intensified efforts to open low cost accounts. Further investment is continuously being directed towards the digital channels to enhance service delivery as well as accommodate the increased transactional volumes created by the broadened customer base as the Bank continues to increase its footprint. The Bank has intensified its efforts in rolling out the low-cost Point of Sale devices (mPOS) in order to support our growing SMEs and sole traders’ clientele base. The year 2019 is likely to be a period in which inflation, currency fluctuations and a shortage of foreign currency play a pivotal role in determining the impact on revenue generation and operating costs. The combination will require a steady guiding hand from the relevant authorities as well as management and Board focus. Early indications point to a tough operating environment for the banking sector. APPRECIATION I would like to express my profound appreciation to our valued clients, shareholders, regulatory authorities and other valued stakeholders for their continued support in this difficult operating environment. To my fellow Board members, management and staff, I extend my sincere gratitude for their hard work, diligence, commitment and resilience which has underpinned the achievement of the commendable results. MR. B. A. CHIKWANHA CHAIRMAN 17 April 2019 7 DIVIDEND ANNOUNCEMENT Notice is hereby given that the board declared a scrip dividend alternative to the cash dividend of 0.96 RTGS cents per share for the year ended 31 December 2018 payable in respect of all the ordinary shares of the Company. The ratio of allotment for the scrip dividend shall be one (1) for every twenty five (25) shares held. The conversion price of the scrip dividend is 24 RTGS cents which was the market price as at 17th April 2019, being the date the directors approved the dividend. This dividend will be payable in full to all Shareholders of the Company registered at the close of business on 10 May 2019. The payment of the dividend will take place on or about 11 June 2019. The applicable shareholders’ tax will be deducted from the Gross dividends. The shares of the Company will be traded cum-dividend on the Zimbabwe Stock Exchange up to the market day of 7 May 2019 and ex-dividend as from 8 May 2019. The forms of election with the full details and terms of the scrip/cash dividend offer will be mailed to shareholders on 17 May 2019 and the last date of receiving the forms of election is 7 June 2019. Shareholders are requested to submit/update their mailing and banking details to the Transfer Secretaries and also immediately contact the Transfer Secretary should they not have received their dividend election forms by 24 May 2019 on the following contacts. First Transfer Secretaries (Pvt) Ltd 1 Armagh Avenue Eastlea Harare Telephone: +263 4 782869/72 or 776628/49/59/69/74 Email: info@fts-net.com By order of the Board S. PASHAPA Company Secretary 17 April 2019 8 Annual Report 2018 REPORT OF THE DIRECTORS for the year ended 31 December 2018 We have pleasure in presenting to shareholders our report and the audited financial statements of the Group for the year ended 31 December 2018. 1. SHARE CAPITAL The authorised and issued share capital of the Company are as follows:- 1.1 Authorised: 600 000 000 ordinary shares of US$0,00028 each. 1.2 Issued and fully paid: 392 955 196 ordinary shares of US$0,00028 each. No share options were exercised during the year. 2. GROUP ACTIVITIES AND RESULTS The Group’s total comprehensive income was US$21 267 632 for the year ended 31 December 2018 (2017 - US$10 029 136). 3. CAPITAL ADEQUACY As at 31 December 2018, the Bank's regulatory capital adequacy ratio was 23.25% (2017 – 24.26%). 4. DIRECTORATE 4.1 Board of Directors Mr. B. A. Chikwanha Mr. B. P. Washaya Mr. B. Ndachena Mr. J. de la Fargue Mr. E. Sandersen Mr. J. Tichelaar Ms. J. Maguranyanga Mr. C. Chikaura Ms. S. Chitehwe Independent Non-Executive Director (Chairman) Chief Executive Officer Chief Finance Officer Non-Executive Director (representing African Century) Non-Executive Director (representing ARISE BV) Non-Executive Director (representing AfricInvest) (alternate Mr B. Zwinkels) Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director In accordance with the Articles of Association, one third of the Directors will retire by rotation at the forthcoming Annual General Meeting (AGM). Those retiring Directors, being eligible, offer themselves for re-election. 4.2 Directors’ Interests As at 31 December 2018, the Directors of the Group (NMBZ Holdings Limited and the Bank) held the following direct and indirect beneficial interests in the shares of the Company:- 31 December 2018 31 December 2017 Mr. B. A. Chikwanha* Ms. J. Maguranyanga Mr. B. P. Washaya** Mr. J. de la Fargue*** Mr. E. Sandersen **** Mr. J. Tichelaar ***** Mr. B. Ndachena****** Mr. C. Chikaura Ms. S. Chitehwe 20 800 600 9 931 - - - 80 448 - - ----------- 111 779 ====== 10 000 600 277 943 - - - 77 642 - - ----------- 366 185 ====== * Mr. B. A. Chikwanha is the Chairman of the board of Directors of NMBZ Holdings Limited and NMB Bank Limited. ** Mr B. P. Washaya is the CEO of NMBZ Holdings Limited and NMB Bank Limited. ***Mr. J. de la Fargue represents African Century Financial Investmnents Limited (73 771 114 shares) on the board of Directors of NMBZ Holdings Limited and NMB Bank Limited. 9 REPORT OF THE DIRECTORS (Cont’d) for the year ended 31 December 2018 4. DIRECTORATE (continued) **** Mr. E Sandersen represents ARISE BV (69 142 858 shares) on the board of Directors of NMBZ Holdings Limited and NMB Bank Limited. ***** Mr J. Tichelaar represents AfricInvest (35 427 111 shares) on the board of Directors of NMBZ Holdings Limited and NMB Bank Limited. ****** Mr. B. Ndachena is the Chief Finance Officer of NMBZ Holdings Limited and NMB Bank Limited. 4.3 Directors’ attendance at meetings 4.3.1 Board of Directors Name Meetings Held Meetings attended Mr. B. A. Chikwanha Mr B.P. Washaya Mr. B. Ndachena Ms. S. Chitehwe Mr. J. de la Fargue Mr. E. Sandersen Ms. J. Maguranyanga Mr. C. Chikaura Mr. J. Tichelaar 4.3.2 Audit Committee Name Ms. S. Chitehwe Mr. C. Chikaura Ms. J. Maguranyanga 4.3.3 Risk and Compliance Management Committee Name Mr. C. Chikaura Mr. J. de la Fargue Mr. E. Sandersen Mr. B. A. Chikwanha 4.3.4 Asset and Liability Management (ALCO) & Finance Committee Name Mr. C. Chikaura Mr. J. de la Fargue Mr. J. Tichelaar Mr. E. Sandersen Mr. B. P. Washaya Mr. B. Ndachena Ms. S. Chitehwe Mr. G. Gore 10 Annual Report 2018 4 4 4 4 4 4 4 4 4 Meetings held 10 10 10 3 4 4 4 4 4 4 4 4 Meetings attended 10 10 9 Meetings Held Meetings Attended 4 4 4 4 4 4 4 3 Meetings held Meetings attended 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 4 REPORT OF THE DIRECTORS (Cont’d) for the year ended 31 December 2018 4.3.5 Loans Review Committee Name Ms. J. Maguranyanga Mr. E. Sandersen Ms. S. Chitehwe Mr. J. Tichelaar 4.3.6 Human Resources, Remuneration and Nominations Committee Name Ms. J. Maguranyanga Mr. B. A. Chikwanha Mr. J. Tichelaar Mr. C. Chikaura Mr. J. de la Fargue 4.3.7 Credit Committee Name Mr. B. A. Chikwanha Mr. B. P. Washaya Mr. J. de la Fargue Mr. C. Chikaura 5. CORPORATE GOVERNANCE Meetings Held Meeting attended 4 4 4 4 4 4 4 4 Meetings held Meetings attended 4 4 4 4 4 4 3 4 4 4 Meetings held Meetings attended 4 4 4 4 3 4 4 4 5.1 5.2 The Group adheres to international best practice with regards to corporate governance. In particular, the Group emulates corporate governance principles set out in the Combined Code of the United Kingdom, the King IV report of South Africa, the National Code on Corporate Governance Zimbabwe and the Reserve Bank of Zimbabwe (RBZ) Corporate Governance Guideline No. 01-2004/BSD. The Board has set up the Audit Committee, Human Resources and Remuneration Committee, ALCO & Finance Committee, Credit Committee, Loans Review Committee and the Risk & Compliance Management Committee to assist in the discharge of its duties and responsibilities. Board and Director evaluations are carried out an annual basis, wherein the effectiveness of the Board is reviewed, including its gender and skills mix. The Board also adheres to the Bank’s Code of Ethics and Environmental and Social Risk Management Framework. The Board of Directors The NMBZ Holdings Limited and NMB Bank Limited boards comprise of nine Directors each. The boards of the holding company and the Bank are identical. The Group obtained regulatory approval to have one board for NMBZ Holdings Limited and the banking subsidiary. The boards comprise, of two executive and seven non-executive Directors. Of the seven non-executive Directors, four are independent non- executive Directors. The Chairpersons of the board and all the board committees are independent non-executive Directors. Furthermore, the independence of the independent non-executive Directors is reviewed on an annual basis. The boards and the board committees meet at least four times a year. Audit Committee The committee oversees the Group's financial reporting process, monitoring the integrity and appropriateness of the Group's financial statements; evaluating the adequacy of internal controls and risk management processes and the selection, compensation, independence and performance of the Group's external and internal auditors. The committee also provides independent oversight of the effectiveness of the Group’s assurance functions and services, with particular focus on combined assurance arrangements. The committee meets at least four times a year. The committee meets regularly with the internal and external auditors. Both the internal and external auditors have unrestricted access to the audit committee to ensure their independence and objectivity. the Group's financial and operational processes, compliance, Membership: Ms. S. Chitehwe Chairperson-Independent Non-Executive Director Ms. J. Maguranyanga Independent Non-Executive Director Mr. C. Chikaura Independent Non-Executive Director 11 REPORT OF THE DIRECTORS (Cont’d) for the year ended 31 December 2018 5. CORPORATE GOVERNANCE (continued) 5.2 Audit Committee (continued) The external auditors, Chief Finance Officer and the Head of Internal Audit are invitees and resource persons at every meeting. The Committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period. 5.3 Human Resources, Remuneration and Nominations Committee Membership: Ms. J. Maguranyanga Chairperson - Independent Non-Executive Director Mr. J. de la Fargue Mr. J. Tichelaar Mr. C. Chikaura Non-Executive Director Non-Executive Director Independent Non-Executive Director Mr. B. A. Chikwanha Independent Non-Executive Director The Chief Executive Officer and Head of Human Capital are invitees and resource persons at every meeting. The Committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period. 5.4 Loans Review Committee The Loans Review Committee assesses compliance of the loan book with the lending policy and the Banking Regulations. The Committee conducts loan reviews independent of any person or committee responsible for sanctioning credit. Membership: Ms. J. Maguranyanga Ms. S. Chitehwe Mr. J. Tichelaar Mr. E. Sandersen Chairperson-Independent Non-Executive Director Independent Non-Executive Director Non-Executive Director Non-Executive Director The Chief Operating Officer and Head of Risk Management are invitees and resource persons at every meeting. The Committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period. 5.5 Credit Committee The Credit Committee’s main responsibilities are to consider loan applications beyond the discretionary limits of the Management Credit Committee and to direct the formulation of, review and monitor the credit principles and policies of the Group. Membership: Mr. B. A. Chikwanha Chairperson - Independent Non-Executive Director Mr. B. P. Washaya Mr. J. de la Fargue Mr. C. Chikaura Chief Executive Officer Non-Executive Director Independent Non-Executive Director The Chief Banking Officer and Head of Credit Management are invitees and resource persons at every meeting. The Committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period. 5.6 Asset and Liability Management (ALCO) & Finance Committee The ALCO & Finance Committee is responsible for deriving the most appropriate strategy for the Group in terms of the mix of assets and liabilities given its expectations of the future and the potential consequences of interest-rate movements, liquidity constraints, foreign exchange exposure and capital adequacy. In addition, the Committee monitors the business and financial strategies of the Company and keeps track of financial performance vis a vis the budget. Membership: Mr. C. Chikaura Chairperson-Independent Non-Executive Director Mr. J de la Fargue Mr. E. Sandersen Mr. J. Tichelaar Ms. S. Chitehwe Non-Executive Director Non-Executive Director Non-Executive Director Independent Non-Executive Director Mr. B. P. Washaya Chief Executive Officer Mr. B. Ndachena Mr. G. Gore Chief Finance Officer Chief Operating Officer 12 Annual Report 2018 REPORT OF THE DIRECTORS (Cont’d) for the year ended 31 December 2018 5. CORPORATE GOVERNANCE (continued) 5.6 Asset and Liability Management (ALCO) & Finance Committee (continued) The Heads of Treasury, Finance and Risk Management are invitees and resource persons at every meeting. The Committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period. 5.7 Risk and Compliance Management Committee The Risk and Compliance Management Committee oversees the quality, integrity and reliability of the Group’s risk management systems and reviews all group-wide risks. Membership: Mr. C. Chikaura Chairperson-Independent Non-Executive Director Mr. E. Sandersen Mr. B. Chikwanha Non-Executive Director Independent Non-Executive Director Mr. J. de la Fargue Non-Executive Director The Chief Operating Officer and Heads of Risk Management and Compliance Management are invitees and resource persons at every meeting. The Committee is satisfied that it has fulfilled its responsibilities in accordance with its terms of reference for the reporting period. 5.8 Professional Advice The non-executive Directors have access to independent professional advice at the Group's expense. 6. AUDITORS At the forthcoming Annual General Meeting, the shareholder will be asked to authorise the Directors to approve the auditors’ remuneration . for the year ended 31 December 2018 and to appoint auditors of the Group for the ensuing year. By order of the Board Miss S I Pashapa Company Secretary Harare 17 April 2019 13 STATEMENT OF DIRECTORS’ RESPONSIBILITY for the year ended 31 December 2018 1. RESPONSIBILITY The Directors of the Group are mandated by the Companies Act (Chapter 24:03) of Zimbabwe to maintain adequate accounting records and to prepare consolidated and separate financial statements that present a true and fair view of the state of affairs of the Group and Company at the end of each financial year. The information contained in these consolidated and separate financial statements has been prepared on a going concern basis and is in accordance with the provisions of the Companies Act (Chapter 24:03) of Zimbabwe, the Banking Act (Chapter 24:20) of Zimbabwe and International Financial Reporting Standards (IFRSs). 2. CORPORATE GOVERNANCE In its operations, the Group is guided by principles of corporate governance derived from the King III Report of South Africa, the National Code on Corporate Governance, the United Kingdom Combined Code and the Reserve Bank of Zimbabwe Corporate Governance Guideline No. 01-2004/BSD. The Directors of the Group are cognisant of their responsibility to exercise the duty of care and act in good faith in order to safeguard all stakeholders’ interests. 3. BOARD OF DIRECTORS Board appointments are made in a manner that ensures an adequate mix of skills and expertise on the board. The majority of the Group’s non-executive Directors are independent and thus provide the necessary checks and balances on the board and ensure that the interests of all stakeholders are taken into account in the decision making process. The Chairman of the board is an independent non-executive Director. The board is assisted by various committees in executing its responsibilities. The board meets at least quarterly to assess risk, review financial performance, and provide guidance to management on operational and policy issues. The board conducts an annual evaluation to assess its effectiveness and develop remedial action plans to address weaknesses noted from the evaluation. The evaluation involves an assessment of collective board performance, the chairperson’s performance and individual Directors’ performance. 4. INTERNAL FINANCIAL CONTROLS The board is responsible for ensuring that effective internal control systems are implemented within the Group. The Group maintains internal controls and systems designed to provide reasonable assurance of the integrity and reliability of its records, safeguard the assets of the group and prevent and detect fraud and errors. The Audit Committee in conjunction with the external and internal auditors of the Group reviews and assesses the internal control systems of the Group in key risk areas. 5. STATEMENT OF COMPLIANCE The consolidated financial statements are prepared with the aim of complying fully with International Financial Reporting Standards (IFRSs) and have been prepared in the manner required by the Companies Act (Chapter 24:03) of Zimbabwe and the Banking Act (Chapter 24:20) of Zimbabwe. The financial statements show the impact of the first time adoption of IFRS 9 which was adopted by the Group effective 1 January 2018. The detailed impact of this adoption is disclosed in the section on significant accounting policies (Changes in accounting policy – page 24). The Directors have been able to achieve full compliance with IFRSs in previous reporting periods. However, the 31 December 2018 financial reporting could only achieve partial compliance to the IFRS reporting framework due to developments detailed below. The IFRS Conceptual Framework states that to achieve fair presentation to the financial statements, companies should consider the underlying economic substance of the transaction over and above the legal form. International Accounting Standard (IAS 21) “TheEffects ofChangesinForeignExchangeRates”requires the Directors to determine the functional currency of the reporting entity in preparing the entity’s financial statements. In arriving at this conclusion, the entity is required to apply certain parameters which the Directors duly applied in their judgement. Furthermore, IAS 21 also requires the reporting entity to make certain judgements in determining the appropriate exchange rates to apply for certain transactions conducted in currencies other than the functional currency of the reporting entity. As explained in Note 2.4.7, “Determinationofthefunctionalcurrency”, it is our opinion that following the Monetary Policy pronouncements of 1 October 2018 and 20 February 2019, as well as the issuance of Exchange Control Directive RU 28 of 2019 on 22 February 2019, the country’s functional currency appeared to have changed from the United States Dollar in terms of the IAS 21 considerations. However, the Government of Zimbabwe issued Statutory Instrument (SI 33) of 2019 on 22 February 2019, which prescribes the rate of USD1:RTGS$1 in accounting for all transactions and events before the effective date of the statutory instrument. Furthermore, it is our interpretation that the SI 33 of 2019 issued in terms of the Presidential Powers Temporary Measures Act [Chapter 10:20], ranks supreme to any contrary legislation including quasi-legislations, which therefore implies that in preparing the financial statements, we sought to comply with the provisions of SI 33 of 2019 ahead of the IAS 21 requirements. This, in our opinion resulted in non-compliance with IAS 21 and that non-compliance had a significant impact on the true and fair presentation of the Group’s financial position and would therefore urge users of the financial statements to exercise due caution. To provide users with additional information, note 40 of the Consolidated Financial Statements provides a detailed analysis of the impact on the Group’s Statement of Financial Position had the aforementioned events after the reporting period been treated as adjusting events at reporting date. The consolidated financial statements were approved by the Board of Directors on 17 April 2019. 5. GOING CONCERN The Directors have assessed the ability of the Group and its subsidiary to continue operating as a going concern and believe that the preparation of these financial statements on a going concern is still appropriate. 6. INTERNAL AUDIT The internal audit function has formally defined objectives, authority, and responsibilities enshrined in the Internal Audit Charter, which principles are consistent with those of the Institute of Internal Auditors. The function is guided by the Internal Audit Manual and the Reserve Bank of Zimbabwe’s Guideline on Minimum Internal Audit Standards in Banking Institutions, in conducting its activities. The internal audit 14 Annual Report 2018 STATEMENT OF DIRECTORS’ RESPONSIBILITY (Cont’d) for the year ended 31 December 2018 6. INTERNAL AUDIT (continued) function is independent of business lines and has unrestricted access to the Audit Committee. The internal audit functions include evaluating the effectiveness of the risk management systems, reviewing the systems of internal control including internal financial controls and the conduct of the Group’s operations. 7. REMUNERATION The Human Resources, Remuneration and Nominations Committee determines the remuneration policy for the Group. The remuneration policy is designed to reward performance and retain highly skilled individuals. Accordingly, a discretionary performance related bonus is offered in addition to a basic salary package. 8. EMPLOYEE PARTICIPATION AND DEVELOPMENT The Group encourages active participation by its employees in its ownership. In line with this commitment, managerial employees have in the past participated in the Group’s share option scheme. The Group is working on operationalising a new share option scheme for staff members approved in the 2012 Annual General Meeting. The Group is also committed to enhancing the skills of staff and sponsors attendance of courses at reputable local and international institutions. 9. SOCIAL RESPONSIBILITY The Group recognises its responsibility in the society within which it operates. The Group’s social investments were channelled into the country’s educational system, the disadvantaged, vulnerable groups, protection of the environment, wildlife conservation, the arts and various sporting disciplines. 10. REGULATION The banking subsidiary of the Group is subject to regulation and supervision by the Reserve Bank of Zimbabwe, which conducts the functions of the Registrar of Banking Institutions and is also the supervisor of banking institutions. Where appropriate, the Group participates in industry-consultative meetings and discussion groups aimed at enhancing the business environment. 11. ETHICS As a Group, we aim to ensure that we adhere to the highest standards of responsible business practice. In that regard, the Group’s values include integrity and excellence. The Group’s employees are thus expected to adhere to the highest standards of personal integrity and professional conduct. The Group monitors its staff conduct through the code of conduct and ensures through its anti-money-laundering policies that it does not conduct business with entities whose activities are unethical. 12. FINANCIAL STATEMENTS The Group’s Directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and in the manner required by the Companies Act (Chapter 24:03) of Zimbabwe and the Banking Act (Chapter 24:20) of Zimbabwe and for such internal control as the Directors determine necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Preparation of the Group financial statements These Group financial statements have been prepared under the supervision of Mr Benson Ndachena, a Chartered Accountant (Zimbabwe), PAAB registration number 00327. Approval of the Group financial statements The consolidated financial statements of the Group appearing on pages 19 to 77 were approved by the Board of Directors on 17 April 2019 and are signed on their behalf by: …………………………………. Mr. B. A. Chikwanha Chairman Date: 17 April 2019 ……………………………… Mr. B. P. Washaya Group Chief Executive Officer Date: 17 April 2019 15 Independent Auditor’s Report To the Shareholders of NMBZ Holdings Limited Report on the Audit of the Consolidated and Separate Financial Statements Adverse Opinion We have audited the consolidated and separate financial statements of NMBZ Holdings Limited and its subsidiaries (the Group), set out on pages 19 - 77 which comprise the consolidated and separate statement of financial position as at 31 December 2018, and the consolidated and separate statement of comprehensive income, consolidated and separate statement of changes in equity and consolidated and separate statement of cash flows for the year then ended, and notes to the consolidated and separate financial statements, including a summary of significant accounting policies. In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated and separate financial statements do not present fairly the consolidated and separate financial position of the Group as at 31 December 2018, and its consolidated and separate financial performance and its consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs). Basis for Adverse Opinion As explained in note 2.4.7 the functional currency applied by management is the United States Dollar (US$) and the financial statements are presented in US$ on the basis that the official exchange rate as at 31 December 2018 between the RTGS Dollar (RTGS$) and the United States Dollar (US$) is 1:1. Zimbabwe witnessed significant monetary and exchange control policy changes in 2016 and increasingly through to 2019 The Reserve Bank of Zimbabwe (RBZ) together with the Ministry of Finance and Economic Development promulgated a series of exchange control operational guidelines and compliance frameworks during this period. Specifically, there was a requirement for banks to separate out FCA RTGS Accounts from the FCA Nostro USD Accounts during October 2018. Although the rate was legally pegged at 1:1, multiple pricing practices and other transactions observed and reported publicly indicated exchange rates other than 1:1 between RTGS and the USD amounts. Finally, in February 2019 there was a Monetary Policy statement which introduced the RTGS Dollar and the interbank foreign exchange market. These events triggered the need for reporting entities to assess whether there was a change in functional currency (from US$ to RTGS$) and the 1:1 RTGS$:US$ exchange rate as at and prior to the 31 December 2018 year end. Based on International Financial Reporting Standards IAS 21 The Effects of Changes in Foreign Exchange Rates (“IAS 21”) the functional currency of an entity is the currency of the primary economic environment in which the entity operates and reflects the underlying transactions, events and conditions that are relevant to it. In addition, paragraph 2.12 of the Conceptual Framework for Financial Reporting (“the Conceptual Framework”) prescribes that for financial information to be useful, it “must not only represent relevant phenomena, but it must also faithfully represent the substance of the phenomena that it purports to represent. In many circumstances, the substance of an economic phenomenon and its legal form are the same. If they are not the same, providing information only about the legal form would not faithfully represent the economic phenomenon.” International Accounting Standard 10 Events after the Reporting Period (“IAS 10”) also requires an entity to adjust the amounts recognised in its financial statements to reflect events after the reporting period that provide evidence of conditions that existed at the end of the reporting period. We believe that events in the market and subsequent promulgation of the RTGS$ as a formal currency supports that there was a change in functional currency from US$ to RTGS$ and that transactions in the market indicated a different rate between the two currencies despite the legal 1:1 RTGS$:US$ exchange rate and that this occurred prior to the 31 December 2018 year end. This impacts the basis for measuring transactions that occurred between 01 October and 31 December 2018, the valuation of assets and liabilities at yearend as well as the accounting for foreign exchange differences. We believe that the consolidated and separate financial statements are required to be adjusted for these changes and that it is inappropriate to provide note disclosures as a proxy for adjusting the financial statements as this is not in conformity with IAS 10. The financial statements of the group include balances and transactions denominated in RTGS$ that were not converted to US$ at a RTGS$:US$ exchange rate that reflects the economic substance of its value as required by International Financial Reporting Standards (“IFRS”). This is because management applied the legal rate of 1:1 as pronounced by Statutory instrument 133 of 2016, Statutory Instrument 33 of 2019 and the Monetary Policy Statements of the 22nd of February 2018, 1st of October 2018 and 20th of February 2019. Management have provided more information on their approach in Note 2.4.7 to the financial statements. In terms of IAS 21, foreign currency monetary items shall be translated using the closing rate, non-monetary items that are measured in terms of historical cost in a foreign currency shall be translated using the exchange rate at the date of the transaction; and non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured. Foreign currency transactions shall be recorded, on initial recognition in the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction. Therefore, had RTGS$ been designated as the functional currency and a different RTGS$: USD$ currency rate been determined and applied by management, virtually every account in, and the information provided by way of notes to, the accompanying financial statements, would have been materially different. The effects of the departure from IFRS are pervasive to the financial statements and have not been quantified. Specifically, the line items impacted in Statement of Financial Position include all assets and liabilities (except Unquoted and other investments, Revaluation reserve and Subordinated term loan,) and all line items on the Statement of Profit or Loss and Other Comprehensive Income. The effects of the above departure from IFRS are therefore pervasive to the financial statements, however the effects have not been quantified. 16 Annual Report 2018 We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated and Separate Financial Statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Zimbabwe, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our adverse opinion. Key Audit Matters Except for the matter described in the Basis for Adverse Opinion section, we have determined that there are no other key audit matters to communicate in our report. Other information The directors are responsible for the other information. The other information comprises the Chairman’s statement, report of the directors, statement of director’s responsibility, financial summary, group profile, dividend announcement, historical five-year summary, notice to members, shareholders analysis and shareholders information and was obtained prior to the date of this report. Other information does not include the consolidated and separate financial statements and our auditors report thereon. Our opinion on the (consolidated and separate) financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. In connection with our audit of the (consolidated and separate) financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. As described in the Basis for Adverse Opinion section above, the Group did not comply with the requirements of IAS 21 – Effects of Changes in Foreign Exchange Rates. We have concluded that the other information is materially misstated for the same reason with respect to the amounts or other items in the Directors’ Report affected by the failure to comply with the referred standard. Responsibilities of the Directors for the Consolidated and Separate Financial Statements The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act (Chapter 24:03), and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated and separate financial statements, the directors are responsible for assessing the group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated and Separate Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group 17 INDEPENDENT AUDITOR’S REPORT INDEPENDENT AUDITOR’S REPORT for the year ended 31 December 2018 for the year ended 31 December 2018 to express an opinion on the consolidated and separate financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on Other Legal and Regulatory Requirements In our opinion, because of the significance of the matter discussed in the Basis for Adverse Opinion section of our report, the accompanying consolidated and separate financial statements have not in all material respects, been properly prepared in compliance with the disclosure requirements of and in the manner required by the Companies Act (Chapter 24:03). The engagement partner on the audit resulting in this independent auditor’s report is David Marange (PAAB Practising Certificate Number 0436). Ernst & Young Chartered Accountants (Zimbabwe) Registered Public Audit Harare 23 April 2019 18 Annual Report 2018 STATEMENTS OF COMPREHENSIVE INCOME For the year ended 31 December 2018 GROUP COMPANY Interest income Interest expense Net interest income Fee and commission income Net foreign exchange gains Revenue Other income Operating income Operating expenditure Net operating income before Net operating income before impairment charge NOTE 4 5 6.1 6.2 7 2018 US$ 39 333 178 (8 865 016) --------------- 30 468 162 28 539 376 1 899 670 --------------- 60 907 208 4 968 447 --------------- 65 875 655 2017 US$ 32 061 931 (9 157 095) --------------- 22 904 836 18 832 185 1 583 164 --------------- 43 320 185 1 129 001 --------------- 44 449 186 (34 720 428) ---------------- (27 578 347) ----------------- 2018 US$ - - --------------- - - - --------------- - 739 175 ----------- 739 175 (7 717) ---------- 16 870 839 731 458 Impairment losses on financial ..assets measured at amortised cost Impairment losses on loans and ....advances Profit before taxation Taxation (charge)/credit 20.3 20.3 8 Profit for the year Other comprehensive income Items that will not be reclassified to ....profit or loss Revaluations, net of tax Total comprehensive income for the year Earnings per share (US cents) -Basic -Diluted 6.3 9.3 9.3 31 155 227 (4 011 952) - --------------- 27 143 275 (5 922 074) --------------- 21 221 201 46 431 -------------- 21 267 632 ========= - (3 853 149) --------------- 13 017 690 (3 078 864) --------------- 9 938 826 90 310 --------------- 10 029 136 ========= 5.43 5.09 2.58 2.43 2017 US$ - - --------------- - - - --------------- - 21 760 --------- 21 760 - --------- 21 760 - - --------- 21 760 (285) ------- 21 475 - --------------- 731 458 1 311 ------------- 732 769 - --------------- - --------------- 732 769 ========= 21 475 ========= 19 STATEMENTS OF FINANCIAL POSITION as at 31 December 2018 GROUP COMPANY SHAREHOLDERS’ FUNDS Share capital Capital reserves Retained earnings Revaluation reserve Total equity Redeemable ordinary shares Subordinated loan Total shareholders’ funds and ....shareholders’ liabilities LIABILITIES NOTE 10.2.1 11 12 13 14 15 Deposits and other liabilities 16.1 Total shareholders’ funds and ....liabilities ASSETS Cash and cash equivalents Current tax assets Loans, advances and other assets Investment securities Non-current assets held for sale Investments:- Trade investments Group companies Quoted and other investments Investment properties Intangible assets Property and equipment Deferred tax assets Total assets 19 8.4 20 17.1 21 22 23 24 25 26 27 18 2018 US$ 80 975 16 526 297 47 377 400 136 741 ---------------- 64 121 413 14 335 253 1 505 647 ---------------- 79 962 313 447 105 283 ---------------- 527 067 596 ---------------- ---------------- 112 440 912 285 822 254 202 945 117 249 434 36 000 112 501 - - 20 950 606 2 036 775 17 844 069 1 908 532 ---------------- 527 067 596 ========= 2017 US$ 78 751 18 119 337 31 612 288 90 310 ---------------- 49 900 686 14 335 253 1 415 904 ---------------- 65 651 843 356 912 509 ---------------- 422 564 352 ---------------- ---------------- 89 553 202 231 007 210 483 221 92 245 425 36 000 102 347 - 15 533 18 977 000 2 380 180 7 335 988 1 204 449 ---------------- 422 564 352 ========= …………………………… MR. B. A. CHIKWANHA MR. B. P. WASHAYA 17 April 2019 Directors 20 Annual Report 2018 2018 US$ 80 975 2017 US$ 78 751 16 526 297 15 821 845 110 370 - ---------------- 16 717 642 14 335 253 - ---------------- 31 052 895 532 478 ---------------- 31 585 373 ---------------- ---------------- 13 635 75 518 860 - - - 31 491 009 - - - - 763 511 - ---------------- 16 664 107 14 335 253 - ---------------- 30 999 360 697 528 ---------------- 31 696 888 ---------------- ---------------- 110 929 75 518 860 - - - 31 491 009 15 533 - - - 4 351 ---------------- 31 585 373 ========= 3 039 ---------------- 31 696 888 ========= ---------------------------- MISS. S. PASHAPA Company Secretary 17 April 2019 STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2018 GROUP Share Capital US$ Share Premium US$ Share Option Reserve US$ Regulatory Reserve US$ Revaluation Reserve US$ Retained Earnings US$ Total US$ Balances at 1 January 2017 78 598 15 737 548 62 563 1 785 136 Share based payments – share options . exercised 153 21 734 Profit for the year Other comprehensive income Transfer to regulatory reserve - - - - - - - - - - - - - 22 185 818 39 849 663 - 21 887 9 938 826 9 938 826 90 310 - 90 310 - - - 512 356 - (512 356) - Balances at 31 December 2017 IFRS 9 adjustments – 1 January 2018 Transfer from regulatory reserve Expected Credit Loss (ECL) adjustment ....-1 January 2018 Deferred tax on ECL adjustment ....-1 January 2018 ..... Restated balances at 1 January 2018 Share issue - scrip dividend Profit for the year Other comprehensive income Dividend paid Balances at 31 December 2018 ---------- 78 751 ---------------- 15 759 282 ----------- 62 563 --------------- 2 297 492 ----------- 90 310 ---------------- 31 612 288 ---------------- 49 900 686 - - - - - - - - - (2 297 492) - 2 297 492 - - - (8 575 988) (8 575 988) 2 208 317 2 208 317 ---------- 78 751 ---------------- 15 759 282 ---------------- 62 563 -------------- - ------------ 90 310 ---------------- 27 542 109 ---------------- 43 533 015 2 224 - - - 704 452 - - - - - - - - - - - - - 46 431 - 21 221 201 - 706 676 21 221 201 46 431 - (1 385 910) (1 385 910) --------- 80 975 ====== ---------------- 16 463 734 ========= ----------- 62 563 ====== ------------ - ======= ----------- 136 741 ====== ----------------- 47 377 400 ========= --------------- 64 121 413 ========= COMPANY Balances at 1 January 2017 Profit for the year Share – based payments – share . options exercised Balances at 31 December 2017 Profit for the year Share issue – scrip dividend Dividends paid Balances at 31 December 2018 Share Capital US$ 78 598 - 153 ----------- 78 751 - 2 224 - ---------- 80 975 ===== Share Premium US$ 15 737 548 - 21 734 ---------------- 15 759 282 - 704 452 - ---------------- 16 463 734 ========= Share Option Reserve US$ 62 563 - - ---------- 62 563 - - - ---------- 62 563 ====== Retained Earnings US$ 742 036 21 475 - ------------ 763 511 732 769 - (1 385 910) ---------------- 110 370 ========= Total US$ 16 620 745 21 475 21 887 ---------------- 16 664 107 732 769 706 676 (1 385 910) ---------------- 16 717 642 ========= 21 GROUP COMPANY 2018 US$ 2017 US$ 2018 US$ 2017 US$ 27 143 275 13 017 690 731 458 21 760 4 011 952 (2 551 436) 20 689 (22 396) (567 032) - (10 154) (76 661) 1 370 312 15 074 171 483 879 376 - - --------------- 30 384 482 3 853 149 (302 255) (16 555) 56 637 (12 951) (35 176) (89 660) 1 136 810 - 165 345 832 567 75 300 - --------------- 18 680 901 - - - - - - 15 074 - - - - - - (21 760) - - - - (747 724) --------------- (1 192) - - --------------- - 90 105 608 (56 133 883) ----------------- 64 356 207 91 525 302 (14 719 275) ---------------- 95 486 928 (4 488 757) - (97 294) --------------- 59 770 156 --------------- (1 757 028) (155 265) - --------------- 93 574 635 --------------- (165 051) - ------------- (166 243) - - (97 294) -------------- (263 537) -------------- 22 396 (535 971) (6 082 924) (9 490 840) (25 004 005) 4 801 846 458 - - ----------------- (36 289 040) ----------------- (81 740) - (573 719) (8 221) --------------- (663 680) --------------- 22 817 436 70 274 89 553 202 ---------------- 112 440 912 ========= 1 076 (1 565 713) (4 792 476) (2 038 933) (67 500 670) 332 951 94 877 2 150 000 - ----------------- (73 318 888) ----------------- (164 931) 21 887 - - -------------- (143 044) -------------- 20 112 703 19 242 69 421 257 --------------- 89 553 202 ========= - - - - - - 458 - 747 724 ------------ 748 182 ------------ - - (573 719) (8 221) ------------- (581 940) ------------- (97 294) - 110 929 ---------- 13 635 ====== 16 000 - ---------- 16 000 - - - --------- 16 000 --------- - - - - - - 94 876 - - ---------- 94 876 ---------- - - - - ------------ - ----------- 110 876 - 53 ----------- 110 929 ====== STATEMENTS OF CASH FLOWS for the year ended 31 December 2018 CASH FLOWS FROM OPERATING ACTIVITIES Profit before taxation Non-cash items - Impairment losses on financial assets measured at amortised cost - Investment properties fair value adjustment - Unrealised foreign exchange loss/(gain) - (Profit)/loss on disposal of property and equipment - Profit on disposal of investment properties - Quoted and other investments fair value adjustment - Trade investments fair value adjustment - Impairment reversal on land and buildings - Depreciation - Loss on disposal of quoted investments - Interest capitalised on subordinated loan - Amortisation of intangible asset - Loss on disposal of non-current asset held for sale - Dividends received Operating cash flows before changes in operating assets and liabilities Changes in operating assets and liabilities Increase/ (decrease) in deposits and other liabilities Increase in loans, advances and other assets Net cash generated from operations Taxation Corporate tax paid Capital gains tax paid Withholding tax on dividends paid Net cash from operating activities CASH FLOWS FROM INVESTING ACTIVITIES Proceeds on disposal of property and equipment Purchase of intangible assets Acquisition of investment properties Acquisition of property and equipment Acquisition (net) of investment securities Proceeds on disposal of investment properties Proceeds on disposal of quoted investments Proceeds on disposal of non-current asset held for sale Dividends received Net cash (used in)/generated from investing activities CASH FLOWS FROM FINANCING ACTIVITIES Payment of interest on subordinated loan Proceeds from share based payments – share options exercised Dividends paid Share issue costs capitalised – scrip dividend Net cash used in financing activities Net increase in cash and cash equivalents Net foreign exchange differences on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year (note 19) 22 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES for the year ended 31 December 2018 BASIS OF CONSOLIDATION The consolidated and separate financial statements comprise of the financial statements of the Group and company. All companies in the Group have a December year end. Inter-group transactions, balances, income and expenses are eliminated on consolidation. BUSINESS COMBINATIONS Business combinations are accounted for using the acquisition method as at the acquisition date – i.e. when control is transferred to the Group. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Subsidiaries Subsidiaries are those investees controlled by the Group. The Group controls an investee if it is exposed to, or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the subsidiary. The financial statements of subsidiaries are included in the consolidated financial statements, using the acquisition method, from the date that control effectively commences until the date that control effectively ceases. In the holding company’s separate financial statements, investment in subsidiaries are accounted for at cost. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if they are related to the issue of debt or equity securities. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not re-measured and settlement is accounted for within equity. Otherwise subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related non-controlling interests (NCI) and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. FOREIGH CURRENCY TRANSACTIONS Transactions in foreign currencies are translated into United States Dollars (US$), which is the respective functional currency of Group entities at the spot exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in the foreign currency translated at the spot exchange rate at the end of the year. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the spot exchange rate at the date on which the fair value is determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction. Foreign currency differences arising on translation are generally recognised in profit or loss. TAXATION Income tax Income tax expenses comprise current, capital gains and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Current tax Current tax comprises expected tax payable or receivable on the taxable income or loss for the year and any adjustment to the tax payable or receivable in respect of previous years. It is measured using rates enacted or substantively enacted at the reporting date in the country where the Group operates and generates taxable income and any adjustment to tax payable in respect of previous years. Current income tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: • • • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. 23 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 Deferred tax (continued) Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. For this purpose, the carrying amount of investment property measured at fair value is presumed to be recovered through sale, and the Group has not rebutted this presumption. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. Additional taxes that arise from the distribution of dividends by the Bank are recognised at the same time as the liability to pay the related dividend is recognised. These amounts are generally recognised in profit or loss because they generally relate to income arising from transactions that were originally recognised in profit or loss. CHANGES IN ACCOUNTING POLICY The Bank has adopted IFRS 9 as issued by the International Accounting Standards Board (IASB) in July 2014 with a date of transition of 1 January 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. As permitted by the transitional provisions of IFRS 9, the Bank elected not to restate comparative figures. Any adjustments to the carrying amounts of financial assets and liabilities at the date of transition were recognised in the opening retained earnings and other reserves of the current period. Consequently, for notes disclosures, the consequential amendments to IFRS 7 disclosures have also only been applied to the current period. The comparative period notes disclosures repeat those disclosures made in the prior year. The adoption of IFRS 9 has resulted in changes in the Bank’s accounting policies for recognition, classification and measurement of financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with financial assets and financial instruments such as IFRS 7 Financial Instruments: Disclosures. Set out below are disclosures relating to the impact of the adoption of IFRS 9 on the Bank. (a) Classification and measurement of financial instruments The measurement category and the carrying amount of financial assets and liabilities in accordance with IAS 39 and IFRS 9 at 1 January 2018 are compared as follows: IAS 39 IFRS 9 Measurement Category Carrying Amount US$ Measurement Category Carrying Amount US$ Amortised cost (Loans and advances) Amortised cost (Loans and advances) Amortised cost (Loans and advances) FVPL (Held for trading) 89,553,202 Amortised cost 89,526,431 210,483,221 Amortised cost 202,308,086 92,245,425 Amortised cost 91,871,343 117,880 392,399,728 FVPL 117,880 383,823, 740 Financial Assets Cash and cash equivalents Loans and advances Investment securities Unquoted and other investments Total Financial Liabilities Total deposits and other liabilities Amortised cost 356,912,509 Amortised cost 356,912,509 24 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) (b) Reconciliation of statement of financial position balances from IAS 39 to IFRS 9 The Bank performed a detailed analysis of its business models for managing financial assets and an analysis of their cash flow characteristics to determine how the instruments shall be measured. The following table reconciles the carrying amounts of financial assets, from their previous measurement categories in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 January 2018: Amortised cost Cash and cash equivalents Opening balance - IAS 39 Additional IFRS 9 impairment allowance - Expected Credit Loss (ECL) Closing balance - IFRS 9 Loans and advances Opening balance - IAS 39 Additional IFRS 9 impairment allowance (ECL) Less reclassifications Closing balance - IFRS 9 Investment securities Opening balance - IAS 39 Less reclassifications Additional IFRS 9 impairment allowance Closing balance - IFRS 9 Total financial assets measured at amortised cost Fair value through profit or loss Unquoted investments Total financial assets Carrying Amount 1 January 2018 US$ 89,553,202 (26,771) ---------------- 89,526,431 ========= 210,483,221 (8,175,135) - ------------------ 202 308 086 ========== 92,245,425 - (374,082) ---------------- 91,871,343 ---------------- ---------------- 383,705,860 117,880 ----- -------------- 383,823,740 ========== (c) Reconciliation of impairment allowance balance from IAS 39 to IFRS 9 The following table reconciles the prior period closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new expected credit loss allowance measured in accordance with the IFRS 9 expected loss model at 1 January 2018: Measurement Category Interbank placements Investment securities Loans and advances Loan commitments Financial guarantees Total IAS 39 Impairment loss allowance balance US$ Remeasurement US$ IFRS 9 Impairment loss allowance balance US$ - - 5 445 968 5 445 968 - - -------------- 5 445 968 ======== 26 771 374 082 8 175 135 6 162 469 1 551 975 460 691 -------------- 8 575 988 ======== 26 771 374 082 13 621 103 11 608 437 1 551 975 460 691 ---------------- 14 021 956 ========= 25 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) Measurement Methods Amortised cost and effective interest rates The amortised cost is the amount at which the financial asset or financial liability is measured at initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount and, for financial assets, an adjustment for any loss allowance. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial asset or financial liability to the gross carrying amount of a financial asset (i.e. its amortised cost before any impairment allowance) or to the amortised cost of a financial liability. The calculation does not consider expected credit losses and includes transaction costs, premiums or discounts and fees and points paid or received that are integral to the effective interest rate, such as origination fees. For purchased or originated credit-impaired (‘POCI’) financial assets – assets that are credit-impaired at initial recognition - the Bank calculates the credit-adjusted effective interest rate, which is calculated based on the amortised cost of the financial asset instead of its gross carrying amount and incorporates the impact of expected credit losses in estimated future cash flows. When the Bank revises the estimates of future cash flows, the carrying amount of the respective financial assets or financial liability is adjusted to reflect the new estimate discounted using the original effective interest rate. Any changes are recognised in profit or loss. Interest Income Interest income is calculated by applying the effective interest rate to the gross carrying amount of financial assets, except for: a) b) Purchased or originated credit-impaired (POCI) financial assets, for which the original credit-adjusted effective interest rate is applied to the amortised cost of the financial asset. Financial assets that are not ‘POCI’ but have subsequently become credit-impaired (or ‘stage 3’), for which interest revenue is calculated by applying the effective interest rate to their amortised cost (i.e net of the expected credit loss provision). Initial recognition and measurement Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of financial assets are recognised on trade-date, the date on which the Bank commits to purchase or sell the asset. At initial recognition, the Bank measures a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss; transaction costs that are incremental and directly attributable to the acquisition or issuance of the financial asset or financial liability respectively, such as fees and commissions. Transaction costs of financial assets and financial liabilities carried at fair value through profit or loss are expensed in profit or loss. Immediately after initial recognition, an expected credit loss allowance (ECL) is recognised for financial assets measured at amortised cost and investments in debt instruments measured at FVOCI, which results in an accounting loss being recognised in profit or loss when an asset is newly originated. When the fair value of financial assets and liabilities differs from the transaction price on initial recognition, the entity recognises the difference as follows: (a) (b) When the fair value is evidenced by a quoted price in an active market for an identical asset or liability (i.e. a Level 1 input) or based on a valuation technique that uses only data from observable markets, the difference is recognised as a gain or loss. In all other cases, the difference is deferred and the timing of recognition of deferred day one profit or loss is determined individually. It is either amortised over the life of the instrument, deferred until the instrument’s fair value can be determined using market observable inputs, or realised through settlement. Financial Assets (i) Classification and subsequent measurement From 1 January 2018, the Group has applied IFRS 9 and classifies its financial assets in the following measurement categories: • • • Fair value through profit or loss (FVPL); Fair value through other comprehensive income (FVOCI); or Amortised cost. The classification requirements for debt and equity instruments are described below: Debt instruments Debt instruments are those instruments that meet the definition of a financial liability from the issuer’s government and corporate bonds and trade receivables purchased from clients in factoring arrangements without recourse. perspective, such as loans, Classification and subsequent measurement of debt instruments depend on: • • the Bank’s business model for managing the asset; and the cash flow characteristics of the asset. Based on these factors, the Bank classifies its debt instruments into one of the following three measurement categories: Amortised cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and interest (‘SPPI’), and that are not designated at FVPL, are measured at amortised cost. The carrying amount of 26 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) Debt instruments (continued) these assets is adjusted by any expected credit loss allowance. Interest income from these financial assets is included in interest and similar income using the effective interest rate method. • • Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent solely payments of principle and interest and that are not designated at FVPL, are measured at fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses on the instrument’s amortised cost which are recognised in profit or loss. When the financial asset is derecognised, the cumulative gain or loss previously recognised in OCI is reclassified from equity to profit or loss and recognised in “Net Investment Income’. Interest income from these financial assets is included in ‘Interest Income’ using the effective interest rate method. Fair value through profit or loss: Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value through profit or loss. A gain or loss on a debt investment that is subsequently measured at fair value through profit or loss and is not part of a hedging relationship is recognised in profit or loss and presented in the profit or loss statement within ‘Net Trading Income” in the period in which it arises, unless it arises from debt instruments that were designated at fair value or which are not held for trading, in which case they are presented separately in ‘Net Investment Income’. Interest income from these financial assets is included in “Interest income” using the effective interest rate method. Business model: the business model reflects how the Bank manages the assets in order to generate cash flows. That is, whether the Bank’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of ‘other’ business model and measured at FVPL. Factors considered by the Bank in determining the business model for a group of assets include past experience on how the cash flows for these assets were collected, how the asset’s performance is evaluated and reported to key management personnel, how risks are assessed and managed and how managers are compensated. Securities held for trading are held principally for the purpose of selling in the near term or are part of a portfolio of financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking. These securities are classified in the ‘other’ business model and measured at FVPL. Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Bank assesses whether financial instruments’ cash flows represent solely payments of principal and interest (the “SPPI” test). In making this assessment, the Bank considers whether the contractual cash flows are consistent with a basic lending arrangement i.e. interest includes only consideration for the time value of money, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at fair value through profit or loss. The Bank reclassifies debt investments when and only when its business model for managing those assets changes. The reclassification takes place from the start of the first reporting period following the change. Such changes are expected to be very infrequent and none occurred during the period. Equity instruments Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares. The Bank subsequently measures all equity investments at fair value through profit or loss, except where the Bank’s management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Bank policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. When this election is used, fair value gains and losses are recognised in OCI and are not subsequently reclassified to profit or loss, including on disposal. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognised in profit or loss as other income when the Bank’s right to receive payments is established. Gains and losses on equity investments at FVPL are included in the ‘Other Income’ line in the statement of profit or loss. (ii) Impairment The Bank recognises loss allowances for Expected Credit Losses (ECLs) on the following financial instruments that are not measured at Fair Value through Profit or Loss (FVPL): • • • • • • loans and advances to banks; loans and advances to customers; debt investment securities; lease receivables; loan commitments issued; and financial guarantee contracts issued. No impairment loss is recognised on equity investments. With the exception of POCI financial assets (which are considered separately below), ECLs are measured through a loss allowance at an amount equal to: 12-month ECL, i.e. lifetime ECL that result from those default events on the financial instrument after the reporting date, (referred to as Stage 1); or Full lifetime ECL, i.e. lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as Stage 2 and Stage 3). that are possible within 12 months A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL. 27 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) Expected Credit Losses ECLs are a probability-weighted estimate of the present value of credit losses. These are measured as the present value of the difference between the cash flows due to the Bank under the contract and the cash flows that the Bank expects to receive arising from the weighting of multiple future economic scenarios, discounted at the asset’s EIR. For undrawn loan commitments, the ECL is the difference between the present value of the difference between the contractual cash flows that are due to the Bank if the holder of the commitment draws down the loan and the cash flows that the Bank expects to receive if the loan is drawn down; and For financial guarantee contracts, the ECL is the difference between the expected payments to reimburse the holder of the guaranteed debt instrument less any amounts that the Bank expects to receive from the holder, the debtor or any other party. The Bank measures ECL on an individual basis, or on a collective basis for portfolios of loans that share similar economic risk characteristics. The measurement of the loss allowance is based on the present value of the asset’s expected cash flows using the asset’s original EIR, regardless of whether it is measured on an individual basis or a collective basis. Credit-impaired financial assets A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: significant financial difficulty of the issuer or the borrower; (a) (b) a breach of contract, such as a default or past due event; (c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise consider; it becoming probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or the purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses. (d) (e) (f) It may not be possible to identify a single discrete event—instead, the combined effect of several events may have caused financial assets to become credit-impaired. Purchased or originated credit-impaired (POCI) financial assets For POCI the Bank only recognises the cumulative changes in lifetime expected credit losses since initial recognition. At each reporting date, the Bank recognises in profit or loss the amount of the change in lifetime expected credit losses as an impairment gain or loss. The Bank recognises favourable changes in lifetime expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than the amount of expected credit losses that were included in the estimated cash flows on initial recognition. The Bank assesses on a forward-looking basis the expected credit losses (‘ECL’) associated with its debt instrument assets carried at amortised cost and FVOCI and with the exposure arising from loan commitments and financial guarantee contracts. The Bank recognises a loss allowance for such losses at each reporting date. The measurement of ECL reflects: • • • An unbiased and probability-weighted amount that is determined by evaluating a range of The time value of money; and Reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions. possible outcomes; For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. The Bank keeps track of the changes in the loss allowance for financial assets separately from those for loan commitments and financial guarantee contracts. However, if a financial instrument includes both a loan (i.e. financial asset) and an undrawn commitment (i.e. loan commitment) component and the Bank does not separately identify the expected credit losses on the loan commitment component from those on the financial asset component, the expected credit losses on the loan commitment is recognised together with the loss allowance for the financial asset. To the extent that the combined expected credit losses exceed the gross carrying amount of the financial asset, the expected credit losses is recognised as a provision. Definition of default Critical to the determination of ECL is the definition of default. The definition of default is used in measuring the amount of ECL and in the determination of whether the loss allowance is based on 12-month or lifetime ECL, as default is a component of the probability of default (PD) which affects both the measurement of ECLs and the identification of a significant increase in credit risk. The Bank considers the following as constituting an event of default: • • The borrower is past due more than 90 days on any material credit obligation to the Bank or; The borrower is unlikely to pay its credit obligations to the Bank in full. The definition of default is appropriately tailored to reflect different characteristics of different types of assets. Overdrafts are considered as being past due once the customer has breached an advised limit or has been advised of a limit smaller than the current amount outstanding. When assessing if the borrower is unlikely to pay its credit obligation, the Bank takes into account both qualitative and quantitative indicators. The information assessed depends on the type of the asset, for example in corporate lending a qualitative indicator used is the breach of covenants, which is not relevant for retail lending. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. The Bank uses a variety of sources of information to assess default which are either developed internally or obtained from external sources. Significant increase in credit risk The Bank monitors all financial assets, undrawn loan commitments and financial guarantee contracts that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase 28 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) (ii) Impairment (continued) Significant increase in credit risk (continued) in credit risk the Bank will measure the loss allowance based on lifetime rather than 12-month ECL. The Bank’s accounting policy is not to use the practical expedient that financial assets with ‘low’ credit risk at the reporting date are deemed not to have had a significant increase in credit risk. As a result the Bank monitors all financial assets, undrawn loan commitments and financial guarantee contracts that are subject to impairment for significant increase in credit risk. In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Bank compares the risk of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument with the risk of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial instrument was first recognised. In making this assessment, the Bank considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort, based on the Bank’s historical experience and expert credit assessment including forward-looking information. Multiple economic scenarios form the basis of determining the probability of default at initial recognition and at subsequent reporting dates. Different economic scenarios will lead to a different probability of default. It is the weighting of these different scenarios that forms the basis of a weighted average probability of default that is used to determine whether credit risk has significantly increased. For corporate lending, forward-looking information includes the future prospects of the industries in which the Bank’s lenders operate, obtained from economic expert reports, financial analysts, governmental bodies and other similar organisations, as well as consideration of various internal and external sources of actual and forecast economic information. For the retail portfolio, forward looking information includes the same economic forecasts as the corporate portfolio with additional forecasts of local economic indicators, particularly for regions with a concentration to certain industries, as well as internally generated information of customer payment behaviour. The Bank allocates its counterparties to a relevant internal credit risk grade depending on their credit quality. The quantitative information is a primary indicator of significant increase in credit risk and is based on the change in lifetime PD by comparing: • • The remaining lifetime PD at the reporting date; with the remaining lifetime PD for this point in time that was estimated based on facts and circumstances at the time of initial recognition of the exposure. The PDs used are forward looking and the Bank uses the same methodologies and data used to measure the loss allowance for ECL. The qualitative factors that indicate significant increase in credit risk are reflected in PD models on a timely basis. However, the Bank still considers separately additional qualitative factors to assess if credit risk has increased significantly. For corporate lending there is particular focus on assets that are included on the Bank’s ‘watch list’ and for the retail portfolio the Bank considers the expectation of forbearance and payment holidays, credit scores and any other changes in the borrower’s circumstances which are likely to adversely affect one’s ability to meet contractual obligations. Given that a significant increase in credit risk since initial recognition is a relative measure, a given change, in absolute terms, in the PD will be more significant for a financial instrument with a lower initial PD than compared to a financial instrument with a higher PD. The Bank assumes that when an asset becomes 30 days past due, the Bank considers that a significant increase in credit risk has occurred and the asset is in stage 2 of the impairment model, i.e. the loss allowance is measured as the lifetime ECL. (iii) Modification of loans The Bank sometimes renegotiates or otherwise modifies the contractual cash flows of loans to customers. When this happens, the Bank assesses whether or not the new terms are substantially different to the original terms. The Bank does this by considering, among others, the following factors: • • • • • • If the borrower is in financial difficulty, whether the modification merely reduces the contractual cash flows to amounts the borrower is expected to be able to pay. Whether any substantial new terms are introduced, such as a profit share/equity-based return that substantially affects the risk profile of the loan. Significant extension of the loan term when the borrower is not in financial difficulty. Significant change in the interest rate. Change in the currency the loan is denominated in. Insertion of collateral, other security or credit enhancements that significantly affect the credit risk associated with the loan. If the terms are substantially different, the Bank derecognises the original financial asset and recognises a ‘new’ asset at fair value and recalculates the new effective interest rate for the asset. The date of renegotiation is consequently considered to be the date of initial recognition for impairment calculation purposes, including for the purpose of determining whether a significant increase in credit risk has occurred. However, the Bank also assesses whether the new financial asset recognised is deemed to be credit-impaired at initial recognition, especially in circumstances where the renegotiation was driven by the debtor being unable to make the originally agreed payments. Differences in the carrying amount are also recognised in profit or loss as a gain or loss on derecognition. If the terms are not substantially different, the renegotiation or modification does not result in derecognition, and the Bank recalculates the gross carrying amount based on the revised cash flows of the financial asset and recognises a modification gain or loss in profit or loss. The new gross carrying amount is recalculated by discounting the modified cash flows at the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets). (iv) Derecognition other than on a modification Financial assets, or a portion thereof, are derecognised when the contractual rights to receive the cash flows from the assets have expired, or when they have been transferred and either • • the Bank transfers substantially all the risks and rewards of ownership, or the Bank neither transfers nor retains substantially all the risks and rewards of ownership and the Bank has not retained control. The Bank enters into transactions where it retains the contractual rights to receive cash flows to other entities and transfers substantially all of the 29 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) (iv) Derecognition other than on a modification (continued) risks and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Bank: (i) Has no obligation to make payments unless it collects equivalent amounts from the assets; (ii) (iii) Has an obligation to remit any cash it collects from the assets without material delay. Is prohibited from selling or pledging the assets; and Collateral (shares and bonds) furnished by the Bank under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the Bank retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met. This also applies to certain securitisation transactions in which the Bank retains a subordinated residual interest. Financial Liabilities Classification and subsequent measurement In both the current and prior period, financial liabilities are classified as subsequently measured at amortised cost, except for: Financial liabilities at fair value through profit or loss: this classification is applied to financial liabilities held for trading (e.g. short positions in the trading booking) and other financial liabilities designated as such at initial recognition. Gains or losses on financial liabilities designated at fair value through profit or loss are presented partially in other comprehensive income (the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability, which is determined as the amount that is not attributable to changes in market conditions that give rise to market risk) and partially profit or loss (the remaining amount of change in the fair value of the liability). This is unless such a presentation would create, or enlarge, an accounting mismatch, in which case the gains and losses attributable to changes in the credit risk of the liability are also presented in profit or loss; Financial liabilities arising from the transfer of financial assets which did not qualify for derecognition, whereby a financial liability is recognised for the consideration received for the transfer. In subsequent periods, the Bank recognises any expense incurred on the financial liability. Derecognition Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled or expires). The exchange between the Bank and its original lenders of debt instruments with substantially different terms, as well as substantial modifications of the terms of existing financial liabilities, are accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in covenants are also taken into consideration. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability. Financial guarantee contracts and loan commitments Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due, in accordance with the terms of a debt instrument. Such financial guarantees are given to banks, financial institutions and others on behalf of customers to secure loans, overdrafts and other banking facilities. Financial guarantee contracts are initially measured at fair value and subsequently measured at the higher of: • • The amount of the loss allowance; and The premium received on initial recognition less income recognised in accordance with the principles of IFRS 15. Loan commitments provided by the Bank are measured as the amount of the loss allowance. The Bank has not provided any commitment to provide loans at below-market interest rate, or that can be settled net in cash or by delivering or issuing another financial instrument. For loan commitments and financial guarantee contracts, the loss allowance is recognised as a provision. However, for contracts that include both a loan and an undrawn commitment and the Bank cannot separately identify the expected credit losses on the undrawn commitment component from those on the loan component, the expected credit losses on the undrawn commitment are recognised together with the loss allowance for the loan. To the extent that the combined expected credit losses exceed the gross carrying amount of the loan, the expected credit losses are recognised as a provision. Critical accounting estimates and judgements The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying the Bank’s accounting policies. Note 2.4 (Use of estimates and judgements) provides an overview of the areas that involve a higher degree of judgement or complexity, and major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment within the next financial year. Detailed information about each of these estimates and judgements is included in the related notes together with information about the basis of calculation for each affected line item in the financial statements. Measurement of the expected credit loss allowance The measurement of the expected credit loss allowance for financial assets measured at amortised cost and FVOCI is an area that requires the use of complex models and significant assumptions about future economic conditions and credit behaviour (e.g. the likelihood of customers defaulting and the resulting losses). A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as: 30 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) Measurement of the expected credit loss allowance (continued) • • • • Determining criteria for significant increase in credit risk; Choosing appropriate models and assumptions for the measurement of ECL; Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and Establishing groups of similar financial assets for the purposes of measuring ECL. The Bank evaluates ECLs for 7 portfolios of audited corporates with overdraft limits, audited corporates without overdraft limits, unaudited corporates with overdraft limits, unaudited corporates without overdraft limits, SMEs with limits, SMEs without limits and Retail loans. The guiding principle of the Expected Credit Loss evaluation is to reflect the general pattern of deterioration or improvement in the credit quality of financial instruments and allocate commensurate loss provisions. Under the general approach, there are two measurement bases: • • 12-month ECLs (Stage 1 ECLs) that is evaluated for all financial instruments with no significant deterioration in credit quality since initial recognition. Lifetime ECLs (Stages 2 and 3 ECLs) that is evaluated for financial instruments for which has occurred on an individual or collective basis. significant increase in credit risk or default Probability of Default (PD) The Bank defines Probability of Default as the likelihood that a borrower will fail to meet their contractual obligations in the future. The Bank’s PD models have been built using historical credit default experience, present credit information as well as forward looking factors which affect the capacity of borrowers to meet their contractual obligations. The Bank used the logistic regression approach to construct PD models for Corporate, SME, Retail and Treasury Bills portfolios while the Merton model was adopted for Interbank Placements. The PD models are used at entity level to evaluate 12-month PDs for Day 1 losses and for financial instruments with no significant deterioration in credit risk since initial recognition, whilst lifetime PD is used for financial instruments for which significant increase in credit risk or default has occurred. 12-month PDs are derived using borrower present risk characteristics while lifetime PDs are derived using a combination of 12-month PDs, present borrower behaviour and forward looking macroeconomic factors. Exposure at Default (EAD) The Bank defines Exposure at Default as an estimation of the extent to which the Bank will be exposed to a counterparty in the event of a default. The Bank’s EAD models have been built using historical experience of debt instruments that defaulted. The Bank used the linear regression approach to construct EAD models for Corporate, SME and Retail portfolios. For TBs and Interbank Placements, the Bank took a conservative approach of considering the full outstanding balance as the EAD at any given point in the lifetime of an instrument. The Bank’s EAD models that use Credit Conversion Factors (CCFs) are applied on fully drawn down instruments while models that use Loan Equivalents (LEQs) are applied on partly drawn instruments. The EAD models are used at entity level to evaluate the proportion of the exposure that will be outstanding at the point of default. Loss Given Default (LGD) The Bank defines Loss Given Default as an estimate of the ultimate credit loss in the event of a default. The Bank’s LGD models were built using historical experience of defaulted debt instruments and observed recoveries. The Bank used the linear regression approach to construct LGD models for Corporate, SME and Retail portfolios. For Treasury Bills and Interbank Placements, the Bank took a conservative approach of taking a fixed 100% as the LGD at any given point in the lifetime of an instrument. The LGD models are used at portfolio level to evaluate 12-month LGDs for financial instruments with no significant increase in credit risk since initial recognition and lifetime is applied LGDs for financial instruments for which significant increase in credit risk has occurred. 12-month LGDs were derived as historical loss rates while lifetime LGDs were derived using a combination of 12-month LGDs and forward looking macroeconomic factors such as GDP and Inflation. The Bank’s ECL model combines the output of the PD, EAD and LGD and computes an Expected Credit Loss that takes into account the time value of money using the Effective Interest Rates (EIR) and time to maturity of the debt instruments. The final ECL is a probability-weighted amount that is determined by evaluating three (3) possible outcomes of Best Case ECL, Baseline Case ECL and Worst Case ECL. The Bank has modelled these three cases in such a way that the Best Case represents scenario of lower than market average default rates, the Base Case represents scenarios of comparable market average default rates and the Worst Case represents scenarios of higher than market average default rates. Forward looking information In its ECL models, NMB Bank relies on a broad range of forward looking information as macroeconomic inputs, such as: Inflation Rate This is the inflation of the country of Zimbabwe. The Bank approximates the impact of inflation on the future quality of the credit portfolio by measuring the variation between the inflation rate at reporting date and the highest forecasted inflation rate for the period 2019-2023. Current inflation data is collected from the Reserve Bank of Zimbabwe (RBZ) and Zimbabwe National Statistics Agency (ZIMSTAT) websites while inflation forecast data is collected from the World Bank websites. Unemployment Rates The Bank defines this as the unemployed proportion of the country’s population. The Bank approximates the impact of unemployment on the future quality of the credit portfolio by assessing the direction of the rate. Increasing unemployment rate tends to indicate economic downsizing in the future while an improving unemployment rate ordinarily indicates economic growth. 31 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 CHANGES IN ACCOUNTING POLICY (continued) Forward looking information (continued) Market Non-Performing Loans Rate The Bank assesses the variance between its non-performing loans rate and the market average NPL rate as at reporting date. The variance approximates the performance of the Bank against the market with respect to the ability of the Bank to underwrite low credit loans. Producer Price Index (PPI) The Bank assesses this as the cost of production for companies. The Bank approximates the impact of PPI on the future quality of the credit portfolio by assessing the direction of the index. Increasing PPI tend to indicate economic downsizing in the future while decreasing PPI ordinarily promotes economic growth in the future. PPI data is collected from the RBZ and ZIMSTAT websites. Renegotiated loans and advances Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been re-negotiated, any impairment is measured using the original effective interest rate (EIR) as calculated before the modification of terms and the loan is no longer considered past due. Management continuously renews re-negotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loans original EIR. Collateral valuation The Group seeks to use collateral, where possible, to mitigate its credit risk on financial assets. The collateral comes in various forms such as cash, securities, letters of credit/guarantees, real estate, receivables, inventories, other non-financial assets and credit enhancements such as netting agreements. The fair value of collateral is generally assessed, at a minimum, at inception and based on the Group’s quarterly reporting schedule, however, some collateral, for example, cash or securities relating to margining requirements, is valued daily. To the extent possible, the Group uses active market data for valuing financial assets, held as collateral. Other financial assets which do not have a readily determinable market value are valued using models. Non-financial collateral, such as real estate, is valued based on data provided by third parties such as mortgage brokers, housing price indices, audited financial statements, and other independent sources. (See note 39.1.4 for further analysis of collateral). Collateral repossessed The Group’s policy is to determine whether a repossessed asset is best used for its internal operations or should be sold. Assets determined to be useful for the internal operations are transferred to their relevant asset category at the lower of their repossessed value or the carrying value of the original secured asset. Assets that are determined better to be sold, are immediately transferred to assets held for sale at their value at the repossession date in line with the Group’s policy. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in the statement of financial position. Non-performing loans Interest on loans and advances is accrued as income until such time as reasonable doubt exists about its recoverability, thereafter and until all or part of the loan is written off, interest continues to accrue on customer’s accounts but is not included in income. The suspended interest is recognised as a provision in the statement of financial position. Such suspended interest is deducted from loans and advances in the statement of financial position. This policy meets the requirements of the Banking Regulations, Statutory Instrument, 205 of 2000. CASH AND CASH EQUIVALENTS Cash and cash equivalents include notes and coins on hand, unrestricted balances held with central bank and highly liquid financial assets with original maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short term commitments. Cash and cash equivalents are carried at amortised cost in the statement of financial position. PROPERTY AND EQUIPMENT Equipment is stated at cost less accumulated depreciation and accumulated impairment losses. Such cost includes the cost of replacing part of the equipment when that cost is incurred, if the recognition criteria are met. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the equipment as a replacement if the recognition criteria are satisfied. The previous remaining carrying amount is derecognized. All other repair and maintenance costs are recognised in the profit or loss as incurred. Land and buildings are measured at revalued amount less accumulated depreciation on buildings and impairment losses recognised after the date of the revaluation. Revaluation of property is performed at the end of each reporting period, by a registered professional valuer. Any revaluation surplus is recognised in other comprehensive income and accumulated in the revaluation reserve included in the equity section of the statement of financial position, except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss. A revaluation deficit is recognised in profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the asset revaluation reserve, the decrease in other comprehensive income reduces the amount accumulated in equity as the asset revaluation reserve, the decrease in other comprehensive income reduces the amount accumulated in equity as the asset revaluation reserve. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. 32 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 PROPERTY AND EQUIPMENT (continued) An annual transfer from the asset revaluation reserve to retained earnings is made for the difference between depreciation based on the revalued carrying amount of the assets and depreciation based on the assets original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. An item of property and plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised. Residual values and the useful life of assets are reviewed at least at each financial year end. Where the residual value of an asset increases to an amount that is equal to or exceeds its 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. Owned assets The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of attributable overheads which are directly attributable to the assets. Depreciation Depreciable amount is the cost of an asset or other amount substituted for cost less its residual value. Depreciation is provided to write off the depreciable amount of property and equipment over their estimated useful lives to their estimated residual values at the following rates per annum, on a straight-line basis. Computers Motor Vehicles Furniture and Equipment Buildings Land and capital work-in-progress are not depreciated. 20% 25% 20% 2% INTANGIBLE ASSETS Intangible assets are initially recognised at cost. Subsequently the assets are measured at cost less accumulated amortisation and any impairment loss. Amortisation of intangible assets The depreciable amount of an intangible asset with a finite useful life is allocated on a straight line basis over its useful life. The amortisation rate is as follows: Computer software LEASES 20% The determination of whether an arrangement is a lease, or it contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. As a lessee Leases which do not transfer to the Group substantially all the risks and rewards incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in profit or loss on a straight line basis over the lease term. Contingent rentals payable are recognised as an expense in the period in which they are incurred. As lessor Leases where the Group does not transfer substantially all the risks and rewards of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. IMPAIRMENT OF NON FINANCIAL ASSETS The carrying amounts of the Group’s non-financial assets other than consumables are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, the assets’ recoverable amounts are estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount of assets is the greater of their fair value less cost to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses of continuing operations are recognised in profit or loss in those expense categories consistent with the functions of the impaired asset, except for property previously revalued where the revaluation was taken to other comprehensive income. In this case, the impairment is also recognised in other comprehensive income up to the amount of any previous revaluation. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist, or may have decreased. If such an indication exists the bank estimates the assets or CGU’s recoverable amount. In determining fair value less costs to sell, an appropriate valuation model is used. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the assets recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceeds the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss. 33 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 INVESTMENT PROPERTIES Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing part of an existing investment property at the time that cost is incurred if the recognition criteria are met, and excludes the costs of day to day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the reporting date. Rental income from investment properties is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. Gains or losses arising from changes in the fair values of investment properties are included in profit or loss in the year in which they arise. Revaluation is done at the end of each year by a registered independent professional valuer. Investment properties are derecognised when either they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in profit or loss in the year of retirement or disposal. Transfers are made to or from investment property only when there is a change in use. For a transfer from investment property to owner occupied If owner occupied property becomes an property, the deemed cost for subsequent accounting is the fair value at the date of change in use. investment property, the Group accounts for such property in accordance with the policy stated under property and equipment up to the date of change in use. FINANCIAL GUARANTEES In the ordinary course of business, the banking subsidiary give financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements at fair value, being the premium received. Subsequent to initial recognition, the Group’s liability under each guarantee is measured at the higher of the amount initially recognised less, where appropriate, cumulative amortisation recognised in profit or loss, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recognised in the profit or loss. The premium received is recognised in profit or loss on a straight line basis over the life of the guarantee, or in full, depending on the conditions attached to the guarantee. WRITE-OFFS Financial assets are written off where the recovery efforts have been pursued actively over one year without success or when it is uneconomical and inefficient to keep carrying the debt in the books as the chances of recovery become slim. Such accounts become subjects of write-backs in the event of recovery. Partial write-offs may be possible in cases where collateral security held is inadequate to expunge the debt in full. FEES AND COMMISSION INCOME Fees and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the EIR. Other fees and commission – including retail banking customer fees, corporate banking and credit related fees, fees from financial guarantee contracts, commission from international banking activities and fees from corporate finance – are recognised as the related services are performed. If a loan commitment is not expected to be drawn down of a loan, then the related commitment fees are recognised on a straight line basis over the commitment period. Other fees and commitment expense relate mainly transaction and service fees, which are expensed as the services are received. INTEREST INCOME For all financial instruments measured at amortised cost and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income includes income arising out of the banking activities of lending and investing. INTEREST EXPENSE Interest expense arises from deposit taking and borrowings. The expense is recognised in profit or loss as it accrues, taking into account the effective interest cost of the liability. EMPLOYEE BENEFITS Retirement benefits are provided for the Group’s employees through a defined contribution plan and the National Social Security Authority Scheme. Defined Contribution Plan Obligations for contribution to the defined contribution pension plan are recognised as an expense in profit or loss as they are incurred. National Social Security Authority Scheme The cost of retirement benefits applicable to the National Social Security Authority, which commenced operations on 1 October 1994 is determined by the systematic recognition of legislated contributions. 34 Annual Report 2018 SIGNIFICANT ACCOUNTING POLICIES(Cont’d) for the year ended 31 December 2018 EMPLOYEE BENEFITS (continued) Short term employee benefits/and share based payments Short term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share based payments The Group issues share options to certain employees in terms of the Employee Share Option Scheme which is an equity settled share-based payment scheme. Share options are measured at fair value of the equity instruments at the grant date. The fair value determined at the grant date of the options is expensed 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 is adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and other behavioural considerations. PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in profit or loss net of any reimbursements. SHAREHOLDERS’ FUNDS AND SHAREHOLDERS’ LIABILITIES Shareholders’ funds and shareholders’ liabilities refers to the total investment made by the shareholders in the Group and it consists of share capital, share premium, share options reserve, retained earnings, redeemable ordinary shares and subordinated loans. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity. Income tax relating to transaction costs of an equity transaction is accounted for in accordance with IAS 12. NON-CURRENT ASSETS HELD FOR SALE Non-current assets or disposal groups are held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. Such assets are generally measured at the lower of the carrying amount and fair value less costs to sell. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognised in profit or loss. Once classified as held for sale, intangible assets and property and equipment are no longer amortised or depreciated. 35 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2018 1. REPORTING ENTITY The Holding Company is incorporated and domiciled in Zimbabwe and is an investment holding company. Its registered office address is Its principal operating subsidiary is engaged in commercial and retail banking. NMB Bank Limited 64 Kwame Nkrumah Avenue, Harare. is a registered commercial bank and was incorporated in Zimbabwe on 16 October 1992 and commenced trading on 1 June 1993. The Bank operated as an Accepting House until 6 December 1999 when the licence was converted to that of a Commercial Bank. The Bank is exposed to the following risks in its operations: liquidity risk, credit risk, market risk, operational risk, foreign currency exchange rate risk and interest rate risk. 2. ACCOUNTING CONVENTION 2.1 Basis of preparation The consolidated and separate financial statements have been prepared under the historical cost convention except for quoted and other investments, investment properties, non-current assets held for sale and financial instruments which are carried at fair value and land and buildings which are stated at the revalued carrying amount. These consolidated financial statements are reported in United States dollars and rounded to the nearest dollar. 2.2 Functional and presentation currency For the purposes of the consolidated financial statements, the results and financial position of the Group are expressed in United States dollars which is the functional currency of the Bank, and the presentation currency for the consolidated financial statements. 2.3 Comparative financial information The Group financial statements comprise the consolidated and separate statements of financial position, comprehensive income, changes in equity and cash flows. The comparative information covers a period of twelve months. 2.4 Use of estimates, judgements and assumptions In preparation of the consolidated and separate financial statements, Directors have made judgments, 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 estimates are recognised prospectively. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment in the year ending 31 December 2018 is included in the following notes. 2.4.1 Deferred tax Deferred taxation is recognised 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. 2.4.2 Land and buildings The properties were valued by an independent professional valuer. The determined fair value of land and buildings is most sensitive to significant unobservable inputs. The property market is currently not stable due to liquidity constraints. 2.4.3 Investment properties Investment properties were valued by an independent professional valuer. The properties market is currently not stable due to liquidity constraints. 2.4.4 Non-current assets held for sale Non-current assets were valued by an independent professional valuer. All non-current assets held for sale are measured at their fair values. The valuer applied the rental yield method to assess fair value of non-current assets held for sale. The determined fair value of non-current assets held for sale is most sensitive to the estimated yield as well as the long term vacancy rate. The property market is currently not stable due to liquidity constraints. 2.4.5 Impairment losses on loans and advances The Group reviews its individually significant loans and advances at each reporting date to assess whether an impairment loss should be In particular, judgement by management is required in the estimation of the amount and timing of future cash recorded in profit or loss. flows when determining the impairment loss. In estimating these cash flows, the Group 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. 36 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 2.4.6 Going concern The Directors have assessed the ability of the Group and Company to continue operating as a going concern and believe that the preparation of these financial statements on a going concern basis is still appropriate. 2.4.7 Determination of the functional currency The Government of Zimbabwe adopted a multi-currency regime in 2009. The British Pound, Euro, United States Dollar (USD), South African Rand (ZAR) and Botswana Pula were adopted as the multi-currency basket in February 2009. In January 2014, the Reserve Bank of Zimbabwe (RBZ) issued a Monetary Policy Statement which added the Chinese Yuan, Australian Dollar, Indian Rupee, Japanese Yen into the basket of multi-currencies. At the onset, the USD and the ZAR were the commonly used currencies, with the USD eventually gaining prominence resulting in it being designated as the functional and presentation currency by the transacting public and the Monetary Authorities, including the Group. Between 2014 and 2016, the Zimbabwean economy experienced a massive liquidity crisis which eventually prompted the Monetary Authorities to introduce the bond notes in November 2016 whilst encouraging the public to continue using the other currencies in the multi- currency basket. The bond notes were introduced at an official fixed exchange rate of 1:1 with the USD and the Monetary Authorities specifically directed financial institutions not to open separate vault and cash accounts for the USD and the bond notes. The introduction of the bond notes gave rise to a three (3) tier pricing system wherein sellers and service providers would quote three (3) separate prices (USD, bond notes and RTGS/electronic transfers) for their merchandise and services respectively. Significant discounts were being offered for USD payments whilst a premium would be added for prices quoted in bond notes or electronic settlement via the Real Time Gross Settlement System (RTGS). These developments triggered a debate around the functional currency of Zimbabwe. It should be noted that the group never participated in the three tier pricing and none of its products had multiple prices during the same period. In October 2018, the Monetary Authorities instructed financial institutions to separate bond notes and USD accounts and indicated that corporates and individuals could proceed to open Nostro Foreign Currency Accounts (FCA), for foreign currency holdings, which were now being exclusively distinguished from the existing RTGS based accounts. However, it should be noted that at the time of this policy pronouncement, the Monetary Authorities did not state that they had introduced a new currency for Zimbabwe, which actually meant that the USD remained as the currency of reference. By 31 December 2018, there had been no pronouncement by the Monetary Authorities to the effect that there had been a new currency introduced, which could be considered as the country’s functional currency. On 22 February 2019, the Reserve Bank of Zimbabwe (RBZ) issued an Exchange Control Directive, RU 28 of 2019 which established an interbank foreign exchange market to formalise the buying and selling of foreign currency through the Banks and Bureaux de change. In order to establish an exchange rate between the current monetary balances and foreign currency, the Monetary Authorities denominated the existing RTGS balances in circulation as RTGS Dollars. Initial trades on 22 February 2019 were at USD1: RTGS$2.5. On the same date, Statutory Instrument 33 of 2019 was also issued and it specified that for accounting and other purposes, all assets and liabilities that were in USD immediately before the 22nd of February 2019 were deemed to have been valued in RTGS Dollars at a rate of 1:1. In light of the developments summarised above, the directors are of the opinion that the USD was the Group’s functional and presentation currency due to the following factors: • • • • • There was no alternative currency at reporting date as the Monetary Authorities only introduced the RTGS Dollars on 22 February 2019; and SI 33 of 2019 specified that for accounting and other purposes, all assets and liabilities that were in USD immediately before the 22nd of February 2019 were deemed to have been valued in RTGS Dollars at a rate of 1:1. Furthermore, the official rate between the USD and bond notes as well as RTGS/electronic balances was pegged at 1:1 on 31 December 2018 and no reliance could be placed on the unofficial rates which were being quoted i.e. the parallel market rate and the Old Mutual Implied Rate, both of which have significant legal limitations. Neither the Group nor its subsidiary ever had a three tier pricing system on any of its products and services during the period under review. Furthermore, neither the Group nor its subsidiary ever sourced foreign currency using either of the two unofficial rates from the time the rates emerged until the introduction of the official interbank foreign exchange market by the Monetary Authorities on 22 February 2019. 2.5 Standards issued and not yet adopted 2.5.1 IFRS 16 Leases IFRS 16 was published in January 2016. It sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16 replaces the previous leases Standard, IAS 17 Leases, and related Interpretations. IFRS 16 has one model for lessees which will result in almost all leases being included on the Statement of Financial position. No significant changes have been included for lessors. The standard is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted only if the entity also adopts IFRS 15. The transitional requirements are different for lessees and lessors. The Group is currently assessing the potential impact on the financial statements resulting from the application of IFRS 16. 2.5.2 IFRC 23 Uncertainty over Tax treatments The changes are applicable to annual reporting periods beginning on or after 1 January 2019. In June 2017, the IASB issued IFRIC Interpretation 23 which clarifies application of the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments. The Group does not anticipate the changes to have a material impact on its financial statements. The interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. 37 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 2.5.3 Amendments to IFRS 9 - Prepayment features with Negative Compensation The changes are effective for annual periods beginning on or after 1 January 2019. The amendments must be applied retrospectively; earlier application is permitted. The amendment provides specific transition provisions if it is only applied in 2019 rather than in 2018 with the rest of IFRS 9. Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are “solely payments of principal and interest on the principal amount outstanding’ (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of the event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the termination of the contract. The Group does not anticipate the changes to have a material impact on its financial statements. 2.5.3 Amendments to IAS 28 These changes are applicable to annual reporting periods beginning on or after 1 January 2019. The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests. The Group does not anticipate the changes to have a material impact on its financial statements. 2.5.4 Amendments to references to the Conceptual Framework in IFRS standards These changes are applicable to annual periods beginning on or after 1 January 2020. In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that, ‘information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.’ The amendments are not expected to have a significant impact on the Group’s financial statements. 2.5.5 Definition of a Business (Amendments to IFRS 3) The amendments must be applied to transactions that are either business combinations or asset acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020. Consequently, entities do not have to revisit such transactions that occurred in prior periods. Earlier application is permitted and must be disclosed. The IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, removed the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs and introduce an optional fair value concentration test. The Group does not anticipate the changes to have a material impact on its financial statements. 38 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 3. SEGMENT INFORMATION For management purposes, the Group 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 Group’s foreign currency denominated banking business and manages relationships with correspondent banks. Digital Banking - Handles the Bank’s Digital Banking products including Card and POS services. 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 consolidated financial statements. Income taxes are managed on a Group 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 Group’s total revenue in 2018 or 2017. The following table presents income and profit and certain asset and liability information regarding the Group’s operating segments and service units: For the year ended 31 December 2018 Banking Banking Treasury Banking Banking Retail Corporate International Digital US$ US$ US$ US$ US$ Other US$ Total US$ Third party income Interest and similar expense Net operating income 24 477 869 17 934 170 12 662 627 491 279 14 206 279 4 968 447 74 740 671 (1 555 990) (3 049 358) (4 259 668) - - (8 865 016) 22 921 879 14 884 812 8 402 959 491 279 14 206 279 4 968 447 65 875 655 Other material non-cash items Impairment losses on financial assets measured at amortised cost 1 263 783 2 637 704 110 465 - - - 4 011 952 Depreciation of property and equipment Amortisation of intangible assets 404 593 - 38 933 - 2 842 - 4 471 413 438 - - 506 035 879 376 1 370 312 879 376 Segment profit/(loss) Income tax expense Other comprehensive income, net of tax 10 610 669 6 478 395 7 135 831 (262 253) 9 658 564 (6 477 931) 27 143 275 - - - - - - - - - - (5 922 074) (5 922 074) 46 431 46 431 Profit/(loss) for the year 10 610 669 6 478 395 7 135 831 (262 253) 9 658 564 (12 353 574) 21 267 632 As at 31 December 2018 Assets and liabilities Capital expenditure Total assets Total liabilities 709 351 100 998 573 123 421 353 232 845 1 731 157 788 029 160 181 794 159 912 290 135 168 359 3 236 3 722 839 15 654 293 4 254 017 5 652 611 - 4 680 034 9 881 214 98 723 750 527 067 596 14 454 635 448 610 930 39 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 3. SEGMENT INFORMATION (continued) The following table presents income and profit and certain asset and liability information regarding the Group’s operating segments and service units: For the year ended 31 December 2017 Banking Banking Treasury Banking Banking Retail Corporate International Digital US$ US$ US$ US$ US$ Other US$ Total US$ Third party income Interest and similar expense Net operating income Other material non-cash items: Impairment losses on financial assets Depreciation of property and equipment Amortisation of intangible assets Segment profit/(loss) before tax Income tax expense Other comprehensive income, net of tax Profit/(loss) for the year As at 31 December 2017 Assets and liabilities Capital expenditure Total assets Total liabilities 4. INTEREST INCOME Loans and advances to banks Loans and advances to customers Investment securities 5. INTEREST EXPENSE Due to banks Due to customers Other borrowed funds 18 806 390 14 362 374 7 658 528 546 651 10 914 710 1 317 628 53 606 281 (1 950 582) (3 392 090) (3 814 423) - - - (9 157 095) 16 855 808 10 970 284 3 844 105 546 651 10 914 710 1 317 628 44 449 186 1 599 035 2 254 114 - - - - 3 853 149 476 499 15 069 9 566 6 127 486 916 - - - - - 142 633 832 567 1 136 810 832 567 2 946 565 3 372 984 2 774 647 (91 733) 2 675 839 1 339 388 13 017 690 - - - - - - - - - - (3 078 864) (3 078 864) 90 310 90 310 2 946 565 ======= 3 372 984 ======= 2 774 647 ======= (91 733) ======= 2 675 839 ======= (1 649 166) ======== 10 029 136 ======== 325 455 2 388 1 958 2 873 1 060 815 2 211 157 3 604 646 103 344 445 152 311 200 118 870 271 3 612 619 5 312 423 39 113 394 422 564 352 109 755 085 127 512 638 96 952 318 15 052 401 - 9 055 971 358 328 413 GROUP COMPANY 2018 US$ 2017 US$ 793 220 28 570 221 9 969 737 39 333 178 ========= 2018 US$ 2 036 353 6 171 065 657 598 8 865 016 ======== 1 139 233 25 986 567 4 936 131 32 061 931 ========= 2017 US$ 1 464 721 7 222 456 469 918 9 157 095 ======== 2018 US$ - - - 2017 US$ - - - - ========= - ========= 2018 US$ - - - - ========= 2017 US$ - - - - ========= 6. NON INTEREST INCOME AND OTHER COMPREHENSIVE INCOME 6.1 Fee and commission income Retail banking customer fees Corporate banking credit related fees Financial guarantee fees International banking commissions Digital banking fees 40 Annual Report 2018 GROUP COMPANY 2018 US$ 11 107 290 2 621 449 148 518 491 279 14 170 840 28 539 376 ========= 2017 US$ 5 718 711 1 463 126 222 187 546 651 10 881 510 2018 US$ - - - - - 2017 US$ - - - - - 18 832 185 ========= - ========= - ========= NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 6.2 OTHER INCOME GROUP COMPANY Quoted and other investments fair Quoted and other investments fair value adjustments Trade investments fair value adjustments Profit on disposal of property and equipment Fair value adjustment on investment properties Profit on disposal of investment properties Loss on disposal of quoted investments Loss on disposal of non-current asset held for sale Rental income Bad debts recovered Other operating income 6.3 Other comprehensive income Revaluations of property and equipment Tax effect (note 18) 7.OPERATING EXPENDITURE The net operating income is after ...charging the following:- Administration costs Audit fees: Current year Prior year Impairment reversal on land and ...buildings* Amortisation of intangible assets Depreciation Directors’ remuneration - Fees for services as Directors - Services rendered - Expenses Staff costs - salaries, allowances and related costs 2018 US$ - 10 154 22 396 2 551 436 567 032 (15 074) - 365 269 1 295 428 171 806 4 968 447 ======== 2018 US$ 62 533 (16 102) 46 431 ====== 2017 US$ 35 176 - - 302 255 12 951 - (75 300) 135 900 580 295 137 724 1 129 001 ======== 2017 US$ 121 630 (31 320) 90 310 ====== 2018 US$ - - - - (15 074) - - - 754 249 739 175 ======= 2018 US$ - - - ====== GROUP COMPANY 2018 US$ 2017 US$ 15 963 308 11 866 111 98 991 111 406 (76 661) 879 376 1 370 312 971 121 219 246 734 511 17 364 15 402 575 34 720 428 ========= 35 938 95 456 (89 660) 832 567 1 136 810 719 318 233 102 476 823 9 393 12 981 807 27 578 347 ========= 2018 US$ 7 717 - - - - - - - - - - 7 717 ======= - ======= 2017 US$ 21 760 - - - - - - - - - 21 760 ====== 2017 US$ - - - ====== 2017 US$ - - - - - - - - - - - *The impairment reversal on land and buildings arose due to fair value changes on the Group’s land and buildings measured using the Revaluation model. 41 2017 US$ - - 285 285 ===== 2017 US$ 5 603 (5 603) - 285 - 285 ======= NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 8. TAXATION 8.1 Income tax charge/(credit) Current tax Capital gains tax Deferred tax (note 18) GROUP COMPANY 2018 US$ 4 433 942 - 1 488 132 5 922 074 ======== 2017 US$ 1 930 812 118 919 1 029 133 3 078 864 ======== 2018 US$ - - (1 311) (1 311) ======= 8.2 Reconciliation of income tax charge/(credit) Based on results for the period at a rate of 25.75% Tax effect of: -Income not subject to tax -Non-deductible expenses -Tax rate differential on capital gains -Capital gains tax 8.3 Reconciliation of income tax charge/(credit) NMB Bank Limited NMBZ Holdings Limited 8.4 Current tax (assets)/liabilities At 1 January Charge for the year (current and capital gains tax) Payments during the year (current and capital gains tax) 9. EARNINGS PER SHARE 2 147 428 (3 214 747) - - 5 922 074 ======== 2018 US$ 5 923 385 (1 311) 5 922 074 ======== GROUP COMPANY 2018 US$ 2017 US$ 6 989 393 3 352 055 (1 677 198) 1 285 088 - 118 919 3 078 864 ======== 2018 US$ 186 670 (187 981) - - - (1 311) ======= GROUP COMPANY 2017 US$ 3 078 579 285 3 078 864 ======== 2018 US$ - (1 311) (1 311) ======== 2017 US$ - 285 285 ======= GROUP COMPANY 2018 US$ 2017 US$ (231 007) (368 445) 4 433 942 (4 488 757) (285 822) ======== 2 049 731 (1 912 293) (231 007) ======== 2018 US$ (75 518) - - (75 518) ======= 2017 US$ (85 752) 10 234 - (75 518) ======= 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 dilutive potential ordinary shares; and (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. 42 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 9. EARNINGS PER SHARE (continued) 9.1 Earnings Profit for the year Weighted average shares in issue 9.2.2 Diluted earnings per share Number of shares at beginning of period Effect of dilution: Share options exercised Shares issued – scrip dividend Share options approved but not granted Diluted weighted average number of shares 9.3 Earnings per share (US cents) Basic Diluted 10. 10.1 SHARE CAPITAL Authorised Ordinary shares of US$0.00028 each 10.2 Issued and fully paid 10.2.1 Ordinary shares At 1 January Share issue – scrip dividend 10.2.2 Redeemable ordinary shares At 1 January 2018 Shares million 600 ====== 31 December 2018 Shares million 282 8 290 ====== 31 December 2018 Shares million 104 104 ====== 8.3 Reconciliation of income tax charge/(credit) 8.4 Current tax (assets)/liabilities GROUP 2017 US$ 9 938 826 ======== 2017 384 746 646 384 427 351 547 191 - 384 974 542 23 942 639 408 917 181 ======== 2018 US$ 21 221 201 ========= 2018 390 959 988 384 974 542 - 7 980 654 392 955 196 23 942 639 416 897 835 ======== 2018 5.43 5.09 2017 2.58 2.43 2017 US$ 168 000 ======= GROUP COMPANY 2017 Shares million 600 ====== 2018 US$ 168 000 ====== GROUP COMPANY 31 December 2017 Shares million 282 - 282 ====== 31 December 2018 US$ 31 December 2017 US$ 78 751 2 224 80 975 ====== 78 751 - 78 751 ====== GROUP COMPANY 31 December 2017 Shares million 104 104 ====== 31 December 2018 US$ 31 December 2017 US$ 29 040 29 040 ====== 29 040 29 040 ====== A total of 7 980 654 ordinary shares were issued to existing shareholders in March 2018 as scrip dividend. Of the unissued ordinary shares of 206 million shares (2017 – 214 million), options which may be granted in terms of the 2012 Employee Share Option Scheme amount to 23 942 639 (2017 – 23 942 639). As at 31 December 2018, no share options were exercised from the Scheme. Subject to the provisions of section 183 of the Companies Act (Chapter 24:03), the unissued shares are under the control of the Directors. 43 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 11. CAPITAL RESERVES GROUP COMPANY Share premium Share option reserve Regulatory Total capital reserve 11.1 Nature and purpose of reserves 11.1.1 Share premium 2018 US$ 16 463 734 62 563 - 16 526 297 ========= 2017 US$ 15 759 282 62 563 2 297 492 18 119 337 ========= 2018 US$ 16 463 734 62 563 - 16 526 297 ========= 2017 US$ 15 759 282 62 563 - 15 821 845 ========= This reserve represents the excess amount paid for the shares over and above the nominal value of the shares. 11.1.2 Share option reserve The share option reserve is used to recognise the value of equity settled share based payment transactions provided to employees, including key management personnel, as part of their remuneration. Refer to note 37.3 for further details of these plans. 11.1.3 Regulatory reserve This reserve represents the excess of the regulatory provision when compared to the IFRS 9 impairment allowance on loan and advances. 11.1.4 Revaluation reserve The Reserve represent gains on the revaluation of property and equipment. 12. RETAINED EARNINGS Analysis of retained profit by company NMBZ Holdings Limited NMB Bank Limited Total GROUP COMPANY 2018 US$ 110 370 47 267 030 47 377 400 ========= 2017 US$ 763 511 30 848 777 31 612 288 ========= 2018 US$ 110 370 - 110 370 ======= 2017 US$ 763 511 - 763 511 ======= Dividend per share (US cents) - - 0.96 0.36 13. REDEEMABLE ORDINARY SHARES GROUP & COMPANY Nominal value (note 10.2.2) Share premium 2018 US$ 29 040 14 306 213 14 335 253 ========= 2017 US$ 29 040 14 306 213 14 335 253 ========= On 30 June 2013 the Company received US$14 831 145 capital from Nederlandse Financierings-Maatschappij Voor Ontiwikkelingslanden N.V. (FMO), Norwegian Investment Fund for Developing Countries (Norfund) and AfricInvest Financial Sector Holdings (AfricInvest) who were allocated 34 571 429 shares each (total 103 714 287) for individually investing US$4 943 715. This amount, net of share issue expenses, was used to recapitalise the Bank in order to contribute towards the minimum capital requirements set by the Reserve Bank of Zimbabwe of US$100 million by 31 December 2020. FMO and Norfund combined together with Rabobank to form ARISE which is a development finance institution primarily focusing on investing in African financial institutions to support and enhance financial service delivery in Africa. NMBZ Holdings Limited (NMBZ) entered into a share buy-back agreement with Norfund, FMO and AfricInvest, where these three strategic investors have a right at their own discretion at any time after the 5th anniversary (30 June 2018) but before the 9th anniversary (30 June 2022) of its first subscription date, to request NMBZ to buy back all or part of its NMBZ shares at a price to be determined using the agreed terms as entailed in the share buy-back agreement. It is a condition precedent that at any point when the share buy-back is being considered, the proceeds used to finance the buy-back should come from the distributable reserves which are over and above the minimum regulatory capital requirements. Further, no buy-back option can be exercised by any investor after the 9th anniversary (30 June 2022) of the effective date. The share buy-back agreement creates a potential obligation for NMBZ Holdings Limited to purchase its own instruments. The shares issued gave rise to a potential financial liability and are classified as redeemable ordinary shares. 44 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 14. SUBORDINATED LOAN GROUP Balance at 1 January Interest capitalised Interest paid 2018 US$ 1 415 904 171 483 (81 740) 1 505 647 ======== 2017 US$ 1 415 490 165 345 (164 931) 1 415 904 ======== In 2013, the Bank received a subordinated term loan amounting to US$1.4 million from a Development Financial Institution which attracts an interest rate of LIBOR plus 10% and has a seven year maturity date (13 June 2020) from the first disbursement date. The above liability would, in the event of the winding up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. The Group has not had any defaults on the interest with respect to this subordinated loan during the year ended 31 December 2018. However, due to the prevailing nostro funding challenges, the Group defaulted on a principal repayment which became due in the period under review. However, there were no defaults on interest payments. There was a breach to the financial covenant regarding to the aggregate large exposure ratio which stood at 25.12% instead of a maximum of 25%. The Group will apply for a waiver of the non- compliant ratio by 31 March 2019. 15. TOTAL SHAREHOLDERS’ FUNDS AND SHAREHOLDERS’ LIABILITIES Shareholders’ funds and shareholders’ liabilities GROUP COMPANY 2018 US$ 79 962 313 79 962 313 ========= 2017 US$ 2018 US$ 2017 US$ 65 651 843 65 651 843 ========= 31 052 895 31 052 895 ========= 30 999 360 30 999 360 ========= Shareholders’ funds and shareholders’ liabilities refer to the total investments made by the shareholders into the Group and it consists of share capital (refer to Note 10), capital and reserves (refer to Note 11), retained earnings (refer to Note 12), redeemable ordinary shares (refer to Note 13) and the subordinated loan (refer to Note 14). 16. DEPOSITS AND OTHER LIABILITIES 16.1 Deposits and other liabilities by type Deposits from banks and other financial institutions** Current and deposit accounts from customers* Total deposits Trade and other payables* GROUP COMPANY 2018 US$ 2017 US$ 74 110 527 17 213 617 360 847 422 434 957 949 12 147 334 447 105 283 ========== 331 742 768 348 956 385 7 956 124 356 912 509 ========== 2018 US$ - - 532 478 532 478 ======= 2017 US$ - - - 697 528 697 528 ======= * ** The carrying amounts of current and deposit accounts and trade and other payables approximate the related fair values due to their short term nature. Included in deposits from banks and other financial institutions are loan balances of US$8 244 147, US$4 129 484 and US$1 043 957 due to Nederlandse Financierings-Maatschappij Voor Ontiwikkelingslanden (FMO), Swedfund and Societie de Promotion de Paticipation Pour la Cooperation Economique SA (Proparco) respectively. The carrying amounts of deposits from banks and other financial institutions approximate the related fair values. The Group has not had any defaults on the principal and interest with respect to these loans during the period ended 31 December 2018. However, there were breaches to the financial covenants with respect to the following :- Non-performing loans ratio – 7.43% (instead of a maximum of 7%). Aggregate large exposure ratio – 25.12% (instead of a maximum of 25%). 45 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 16. DEPOSITS AND OTHER LIABILITIES (continued) 16.2 Maturity analysis Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years Over 5 years 16.3 Sectoral analysis of deposits Agriculture Banks and other financial institutions Distribution Individuals Manufacturing Mining companies Municipalities and parastatals Other deposits Services Transport and telecommunications companies 17. 17.1 FINANCIAL INSTRUMENTS Investment securities Held to maturity Loans and receivables Armotised cost – Gross Impairment loss allowance - ECL at 1 January 2018 - ECL charged through profit or loss GROUP 2018 US$ 374 121 777 25 835 037 7 515 300 11 781 062 15 512 943 191 830 434 957 949 ========== GROUP % 2 17 10 6 16 2 7 14 23 3 100 === 2017 US$ 10 034 243 17 213 617 38 540 570 29 133 379 62 426 525 8 086 319 25 633 695 57 598 053 87 501 920 12 788 064 348 956 385 ========== 2017 US$ 279 698 410 37 746 638 2 472 911 11 751 881 17 094 715 191 830 348 956 385 ========== % 3 5 11 8 18 2 7 17 25 4 100 === NOTE 20.3 20.3 GROUP 2018 US$ - - 117 693 824 (444 390) (374 082) (70 308) 117 249 434 ========= 2017 US$ 13 744 715 78 500 710 - - - - 92 245 425 ========= 2018 US$ 11 005 126 74 110 527 42 030 992 27 742 789 69 798 745 9 077 534 28 945 864 59 781 285 98 028 025 14 437 062 434 957 949 ========== The Group holds Treasury Bills and Government bonds amounting to US$117 693 825 with interest rates ranging from 2% to 10%. Liquidity induced trades have occurred in the secondary market and there is industry consensus that these trades do not represent free market activity. In light of the absence of an observable active market for the Treasury Bills, the instruments are measured at amortised cost. Of the total Treasury Bills balance of $117 693 825, a total of US$85 415 837 has been pledged as security on interbank borrowings. 46 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 17. FINANCIAL INSTRUMENTS (cont’d) 17.2 Maturity analysis of investment securities held to maturity Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 year to 5 years Over 5 years 17.3 Maturity analysis of investment securities – loans and receivables Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 year to 5 years 17.4 Maturity analysis of investment securities – amortised cost Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 year to 5 years Over 5 years Expected credit loss 17.5 Fair values of financial instruments 2018 US$ 2017 US$ - - - - - - ========= 2018 US$ - - - - - - ========= 2018 US$ - 142 245 6 133 977 43 004 020 57 031 351 11 382 231 117 693 824 (444 390) 117 249 434 ========= - - 2 424 461 - 11 320 254 13 744 715 ========= 2017 US$ 6 150 000 142 246 722 972 6 138 889 65 346 603 78 500 710 ========= 2017 US$ - - - - - - - - - ========= The fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices or dealer price quotations. For all other financial instruments, the Group determines fair values using other valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgement depending on liquidity, concentration, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. Valuation models The Group measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements. • • • Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments; Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The objective of valuation techniques is to arrive at a fair value measurement that reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. 47 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 17. FINANCIAL INSTRUMENTS (continued) 17.5 Fair values of financial instruments (continued) Financial instruments measured at fair value – fair value hierarchy Trade investments Quoted investments Trade investments Quoted investments 31 Dec 2018 US$ 112 501 - 112 501 ====== 31 Dec 2017 US$ 102 347 15 533 117 880 ====== GROUP Level 1 US$ - - - ======= Level 1 US$ - 15 533 15 533 ====== Level 2 US$ - - - ======= Level 2 US$ - - - ======= Level 3 US$ 112 501 - 112 501 ======= Level 3 US$ 102 347 - 102 347 ======= During the reporting periods ended 31 December 2018 and 31 December 2017, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. The trade investments were valued using the market approach valuation method. 17.5.1 Financial instruments not measured at fair value Below is a list of the Group’s assets and liabilities not measured at fair value, but whose carrying amounts approximate fair value: 31 December 2018 Assets Cash and cash equivalents Loans, advances and other assets Investment securities Liabilities Deposits and other liabilities 31 December 2017 Cash and cash equivalents Loans, advances and other assets Investment securities Liabilities Deposits and other liabilities GROUP Level 1 US$ Level 2 US$ Level 3 US$ - - - - ========== - - ========= - - - - ========= - - ========= 112 440 912 - - 112 440 912 ========== 447 105 281 447 105 281 ========== 89 553 202 - - 89 553 202 ========= 356 912 509 356 912 509 ========= - 254 202 945 117 249 434 371 452 379 ========== - - ========= - 210 483 221 92 245 425 302 728 646 ========== - - ========= Total carrying Amount US$ 112 440 912 254 202 945 117 249 434 483 893 291 ========== 447 105 281 447 105 281 ========== 89 553 202 210 483 221 92 245 425 392 281 848 ========== 356 912 509 356 912 509 ========== 48 Annual Report 2018 During the reporting periods ended 31 December 2018 and 31 December 2017, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. The trade investments were valued using the market approach valuation method. NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 17. FINANCIAL INSTRUMENTS (continued) 17.5.1 Financial instruments not measured at fair value (continued) Cash and cash equivalents Cash and cash equivalents consists of balances with the Central Bank, other banks and cash with original maturities of three months or less. These balances are subject to insignificant risk of change in their fair value. It is the Directors’ assessment that the carrying amount of these balances approximates their fair value at any given time. Loans, advances and other assets The estimated fair value of loans, advances and other assets is estimated to approximate the carrying amount due to non-availability of benchmark interest rates to discount the expected future cash flows thereof. The Directors believe that current interest rates are market related and would re-issue the loans at the same interest rate if needed. It is from this assessment that Directors believe that the carrying amount of these balances reasonably approximate fair value as discounting the future cash flow using the current interest rates would not result in significant differences from the carrying amount. Investment securities These financial assets consist of open market treasury bills and government bonds. There is currently no observable active market for these instruments; or a reliable proxy to discount the expected future cash flows. Directors believe that the carrying amount approximates fair value on these instruments. In performing this assessment, Directors have determined that interest rates are consistent with the latest transactions that the Group entered into and the average tenor of the portfolio was short-term in nature. Deposits and other liabilities The estimated fair value of deposits with no stated maturity, which includes non-interest bearing deposits, is the amount repayable on demand. The estimated fair value of fixed interest-bearing deposits approximates the carrying amount as interest rates quoted are market related. It is the view of Directors that the carrying amounts of these assets and liabilities reasonably approximate fair values. 18. DEFERRED TAX The following table shows deferred tax (assets)/liabilities recorded in the statement of financial position and changes recorded in the statement of financial position and changes recorded in the income tax expense: GROUP COMPANY Allowance for impairment losses on financial assets Bad debts Prepayments Quoted and other investments Non-current assets held for sale Investment properties Property and equipment Staff loans Unrealised foreign exchange gains Suspended interest Deferred income Assessed losses Provision for share based payments Provision for leave pay Closing deferred tax asset Restated opening balance at 1 January 2018 Deferred tax asset at the beginning of the year Deferred tax adjustment on adoption of IFRS 9 on 1 January 2018 Current year charge/(credit) Relating to profit or loss (note 8.1) Relating to other comprehensive income (note 6.3) 2018 US$ (3 556 592) (501 837) - 5 623 1 800 2 627 773 291 459 - 407 694 (278 267) (39 744) (15 926) (4 350) (846 165) (1 908 532) (3 412 766) (1 204 449) (2 208 317) (1 504 234) 1 488 132 16 102 2017 US$ (1 402 337) (1 187 613) 232 241 6 429 1 800 971 758 697 611 (71 249) 401 164 (315 572) (67 670) (12 386) (4 350) (454 275) (1 204 449) (2 264 902) (2 264 902) - 1 060 453 1 029 133 31 320 2018 US$ 2017 US$ - - (4 350) - (4 350) - (3 039) - (1 311) (1 311) - - - 1 311 - - - - - - - - (4 350) - (3 039) - (3 859) - 820 285 535 49 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 19. CASH AND CASH EQUIVALENTS Balances with Reserve Bank of Zimbabwe Balances with the Central Bank* Current, nostro accounts** and cash Interbank placements Expected credit loss allowance GROUP COMPANY 2018 US$ 89 081 480 13 426 360 10 000 000 (66 928) 112 440 912 ========= 2017 US$ 79 876 937 6 676 265 3 000 000 - 89 553 202 ========= 2018 US$ - 13 635 - - 13 635 ===== 2017 US$ - 110 929 - - 110 929 ====== Interbank placement NOTE 2018 US$ 2017 US$ Interbank placements 10 000 000 3 000 000 Expected credit loss allowance 20.3 -ECL at 1 January 2018 -ECL charge through profit and loss (66 928) (26 771) (40 157) 9 933 072 ======== - - - 3 000 000 ======== *Balances with the Central Bank, other banks and cash are used to facilitate customer transactions which include payments and cash withdrawals. During the year the Central Bank through Exchange Control Operational Guide 8 (ECOGAD8) introduced prioritisation criteria which has to be followed when making foreign payments on behalf of customers. After prioritisation, foreign payments are then made subject to availability of bank balances with our foreign correspondent banks, resulting in possible delay of payment of telegraphic transfers. However, no delay is expected in the settlement of local transactions through the Real Time Gross Settlement (RTGS) system. **Nostro accounts are foreign domiciled bank accounts operated by the Bank for the facilitation of offshore transactions on behalf of clients. Of the cash and cash equivalents balance, an amount of US$526 316 was pledged to Proparco as collateral for offshore lines of credit. 20. LOANS, ADVANCES AND OTHER ASSETS Fixed term loans - Corporate Fixed term loans – Retail Mortgages Overdrafts Other assets GROUP 2018 US$ 58 036 580 77 580 291 61 390 107 50 946 710 247 953 688 6 249 257 254 202 945 ========== 2017 US$ 54 435 318 65 227 917 37 295 987 47 374 705 204 333 927 6 149 294 210 483 221 ========== COMPANY 2018 US$ - - - - - 860 860 ==== 2017 US$ - - - - - 860 860 ==== 50 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 20. LOANS, ADVANCES AND OTHER ASSETS (continued) 20.1.1 Maturity analysis GROUP COMPANY 2018 US$ 2017 US$ Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year 1 to 5 years Over 5 years Total loans and advances Allowance for impairment losses on loans and advances -IAS 39 impairment loss allowance at 1 January 2018 -ECL recognised through retained earnings -ECL charged through profit and loss -IAS 39 charge through profit and loss Bad debts written off Provision for suspended interest Other assets (note 20.5) 20.2 Sectoral analysis of utilisations Agriculture and horticulture Conglomerates Distribution Food & beverages Individuals Manufacturing Mining Services - - - - - - - - - - - - - - - 860 860 === 2018 US$ 67 413 196 19 263 549 6 828 594 24 887 015 94 242 902 49 699 770 262 335 026 2017 US$ 71 137 746 10 680 845 2 954 340 11 024 220 80 804 577 34 403 690 211 005 418 (13 300 688) (5 445 968) (5 445 968) (8 305 117) - - (3 853 149) 6 712 298 (1 225 523) 204 333 927 6 149 294 210 483 221 ========== (8 175 135) (3 901 487) - 4 221 902 (1 080 650) 247 953 688 6 249 257 254 202 945 ========== 2018 US$ 37 386 857 10 692 402 28 902 108 6 304 863 100 512 291 8 731 095 703 294 69 102 116 262 335 026 ========= GROUP 2017 US$ 28 531 460 9 210 926 28 737 726 10 417 745 82 589 355 8 565 178 736 466 42 216 562 211 005 418 ========= % 14 4 11 3 38 3 - 27 100 === - - - - - - - - - - - - - - 860 860 ==== % 14 4 14 5 39 4 - 20 100 === 51 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 20.3 Impairment analysis of financial assets measured at amortised cost Gross carrying amount at 1 January 2018 Transfers - to 12 month ECL - to lifetime ECL not credited impaired - to lifetime ECL credit impaired Net movement financial assets Balance as at 31 December 2018 Loss allowance analysis At 1 January 2018 (IAS 39 Provisions) Adjustment on initial application of IFRS 9* ECL on 1 January 2018 -ECL – loans and advances -ECL – Investment securities -ECL – Interbank placements Transfers - to 12 month ECL - to lifetime ECL not credited impaired - to lifetime ECL credit impaired Net increase/(decrease) in ECL Bad debts written off Balance as at 31 December 2018 Loans and advances Investment securities Interbank placements Stage 1 Stage 2 GROUP 307 212 628 (9 071 715) 1 422 126 (9 561 225) (932 616) 74 121 127 372 262 040 - - 9 075 323 8 674 470 374 082 26 771 (445 983) 30 024 (219 448) (256 559) (879 896) - 7 749 444 7 238 126 444 390 66 928 7 749 444 19 328 471 (2 794 360) (1 096 550) 10 357 548 (12 055 358) 8 583 823 25 117 934 - - 1 335 253 1 335 253 - - (3 253 424) (18 951) 356 161 (3 590 634) 2 771 543 - 853 372 853 372 - - 853 372 Stage 3 16 848 747 11 866 075 (325 576) (796 323) 12 987 974 (9 235 272) 19 479 550 - - 3 611 380 3 611 380 - - 3 699 407 (11 073) (136 713) 3 847 193 2 120 305 (4 221 902) 5 209 190 5 209 190 - - 5 209 190 Total 343 389 846 - - - - 73 469 678 416 859 524 5 445 968 8 575 988 14 021 956 - - - - - - - 4 011 952 (4 221 902) 13 812 006 13 300 688 444 390 66 928 13 812 006 *The Group adopted IFRS 9 effective 1 January 2018 and the resultant increase in impairment allowance on the effective date was recognized through retained earnings as the Group did not elect restrospective application of the Standard. 20.4 Allowances for impairment losses on loans and advances and financial assets measured at amortised cost Interbank placement At 1 January Recognised in profit or loss Bad debts written off At 31 December Specific US$ 6 207 672 3 334 133 (6 712 298) 2 829 507 ========== GROUP 2017 Portfolio US$ 2 097 445 519 016 - 2 616 461 ========== 20.5 Credit-impaired financial assets Total credit-impaired financial assets Allowance for impairment losses on loans and advances Expected Credit Losses on credit-impaired financial assets Retail loans insurance Suspended interest on credit-impaired financial assets Net non-performing loans and advances 2018 US$ 19 479 550 - (5 209 190) (499 057) (1 080 650) 12 690 653 ========= Total US$ 8 305 117 3 853 149 (6 712 298) 5 445 968 ========== 2017 US$ 16 848 747 (2 829 507) - (1 457 059) (1 225 523) 11 336 658 ========= The net credit-impaired financial assets represent recoverable portions covered by realisable security, which includes guarantees, cessation of debtors, mortgages over properties, equities and promissory notes all fair valued at US$9 212 125 (2017 - US$15 483 847). 52 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 20. LOANS, ADVANCES AND OTHER ASSETS (continued) 20.6 Other assets GROUP COMPANY Service deposits* Prepayments and stocks Other receivables 2018 US$ 3 308 570 1 036 379 1 904 308 6 249 257 ======== 2017 US$ 3 308 570 1 306 665 1 534 059 6 149 294 ======== 2018 US$ - - 860 860 === 2017 US$ - - 860 860 === *Service deposits relate to amounts pledged as collateral for VISA and the RTGS accounts. 20.7 Loans to officers Included in advances and other accounts (note 20.1) are loans to officers:- At 1 January Net additions during the year Fair value adjustment Expected credit loss allowance on loans to officers - Stage 1 Balance at 31 December GROUP 2018 US$ 2017 US$ 7 299 138 4 816 350 12 115 488 - (159 656) 11 955 832 ========= 7 011 331 555 338 7 566 669 (267 531) - 7 299 138 ========= Loans to officers amounting to US$1 306 190 were granted at a preferential rate of 6% per annum as part of their overall remuneration agreements, US$1 558 584 was granted at a commercial rate of 8.5% per annum and the balance amounting to US$9 250 714 being mortgage loans which were granted at a commercial rate of 12% per annum. Product Overdraft Loan Tenure Payable on demand Interest rate Penalty interest rate of ten percentage points above loan rate up to a maximum penalty rate of 18% per annum. Loan payable over a maximum period of 120 months (includes mortgage loans). From 6% per annum up to a maximum of 18% per annum. Loans to employees and executive Directors are at a discounted interest rate. Bankers Acceptances Loan payable over a minimum period of 30 days up to 90 days. Average of 10% per annum. 21. NON-CURRENT ASSETS HELD FOR SALE At 1 January Fair value adjustment Disposals GROUP COMPANY 2018 US$ 36 000 - - 36 000 ====== 2017 US$ 2 261 300 - (2 225 300) 36 000 ====== 2018 US$ - - - ====== 2017 US$ - - - - ====== 53 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 21. NON-CURRENT ASSETS HELD FOR SALE (continued) Measurement of fair value Fair value hierarchy The fair value of non-current assets held for sale was determined by an independent professional valuer, PMA Real Estate (Private) Limited. The valuation which conforms to International Valuation Standards, was in terms of the policy as set out in the accounting policies section and was derived with reference to market information close to the date of the valuation. Non-current assets held for sale are measured at fair value. The values were arrived at by applying weighted average rate of US$3 per square metre. Level 2 The fair value of non-current assets held for sale of U$36 000 (2017 – US$36 000) has been categorised under level 2 in the fair value hierarchy based on the inputs used for the valuation technique highlighted above. (see note 2.4.4 use of judgement and estimates). 22. TRADE INVESTMENTS Unlisted Directors’ valuation GROUP COMPANY 2018 US$ 112 501 ====== 112 501 ====== 2017 US$ 102 347 ====== 102 347 ====== 2018 US$ - ===== - ===== 2017 US$ - ===== - ===== Unlisted trade investments represent an equity investment in SWIFT. The trade investments were valued using the market approach valuation method at 31 December 2018 (see note 17.5 on fair value measurement). 23. INVESTMENTS IN GROUP COMPANIES 23.1 Subsidiaries Investments in subsidiaries: -NMB Bank Limited 23.2 Shareholding COMPANY 2018 US$ 31 491 009 31 491 009 ========= 2017 US$ 31 491 009 31 491 009 ========= The subsidiary is registered in Zimbabwe, and the extent of the Group's beneficial business activities are listed below:- interest therein and its principal NMB Bank Limited 2018 2017 100% (Banking) 100% (Banking) The consolidated financial statements include the financial information of the subsidiary listed above. 24. QUOTED AND OTHER INVESTMENTS GROUP COMPANY 2018 US$ - ====== 2017 US$ 15 533 ===== 2018 US$ - ====== 2017 US$ 15 533 ====== Quoted investments 54 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 25. INVESTMENT PROPERTIES At 1 January Acquisitions Fair value adjustments Disposal Transfers to property and equipment At 31 December GROUP 2018 US$ 18 977 000 6 082 924 2 551 436 (4 360 754) (2 300 000) 20 950 606 ========= 2017 US$ 14 202 270 4 792 475 302 255 (320 000) - 18 977 000 ========= Investment properties comprise commercial and residential properties that are leased out to third parties and land held for future development. No properties were encumbered. Rental income amounting to US$365 269 (2017 - US$135 900) was received and no operating expenses were incurred on the investment properties in the current year due to the net leasing arrangement on the properties. Included in investment properties are properties which were acquired as part of the foreclosure process with marketability restrictions measured at US$8 355 661 as at 31 December 2018. The Group has no restrictions on the realisability of all the remaining investment properties and no contractual obligations to purchase, construct or develop the investment properties or for repairs, maintenance and enhancements Measurement of fair value Fair value hierarchy The fair value of the Group's investment properties as at 31 December 2018 has been arrived at on the basis of valuations carried out by independent professional valuers, PMA Real Estate (Private) Limited. The valuation which conforms to International Valuation Standards, was in terms of the policy as set out in the accounting policies section and was derived with reference to market information close to the date of the valuation. Level 2 The fair value for investment properties of US$12 594 944 (2017 - US$8 722 000) has been categorised under level 2 in the fair value hierarchy based on the inputs used for the valuation technique described below. The following shows reconciliation between the opening and closing balance for level 2 fair values: At 1 January Acquisitions Disposals Fair value adjustments Transfers from Level 3 Transfers to property and equipment Balance at 31 December 2018 US$ 8 722 000 3 247 175 - 1 281 769 1 644 000 (2 300 000) 12 594 944 ========= 2017 US$ 7 382 270 1 740 158 (320 000) (80 428) - - 8 722 000 ======== The values were arrived at by applying yield rates of 10% on rental values of between US$4 - US$7 per square metre. The properties are leased out under operating leases to various tenants. Level 3 The fair value for investment properties of US$8 355 662 (2017 - US$10 255 000) has been categorised under level 3 in the fair value hierarchy based on the inputs used for the valuation technique described below. 55 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 25. INVESTMENT PROPERTIES (continued) The following shows reconciliation between the opening and closing balances for level 3 fair values: At 1 January Acquisitions Disposals Fair value adjustments Transfers to Level 2 Balance at 31 December 2018 US$ 10 255 000 2 835 749 (4 360 754) 1 269 667 (1 644 000) 8 355 662 ======== 2017 US$ 6 820 000 3 052 317 - 382 683 - 10 255 000 ========= Valuation technique and significant unobservable inputs The following table shows the valuation technique used in measuring the fair value of investment properties, as well as the significant unobservable inputs used. Valuation technique Significant unobservable inputs The investment method (Discounted cash flows) was used to value all income producing properties. The direct comparison method was applied on all residential properties • • • • • Weighted average expected market rental growth (5%); Void period (average 3 months after the end of each lease); Occupancy rate (55%); and Average market yield of 10%. Marketability restrictions for level 3 items due to underlying contractual agreements with third parties. 26. INTANGIBLE ASSETS Cost Balance at 1 January 2017 Acquisitions Balance at 1 January 2018 Acquisitions Capitalisations Balance at 31 December 2018 Accumulated amortisation Balance at 1 January 2017 Amortisation for the year Balance at 1 January 2018 Amortisation for the year Balance at 31 December 2018 Carrying amount At 31 December 2018 At 1 January 2018 At 1 January 2017 Work in progress US$ 228 595 - 228 595 - (228 595) - ======= - - - - - ======= - ======= 228 595 ======= 228 595 ======= inter-relationship between key unobservable inputs and fair value measurement • The estimated fair value would increase /(decrease) if: expected market rental growth were higher/ (lower); void periods were shorter/(longer); the occupancy rates were higher /(lower); and the risk adjusted discount rates were lower/ (higher). • • • • • Below is an indication of the sensitivity analysis at different discount rates:- Change in rate Change in fair value +5% +3% +1% -1% -3% -5% 1 165 911 699 546 233 182 -233 182 -699 546 -1 165 911 Computer software US$ 3 045 126 1 565 713 4 610 839 535 971 228 595 5 375 405 ======== 1 626 687 832 567 2 459 254 879 376 3 338 630 ======== 2 036 775 ======== 2 151 585 ======== 1 418 439 ======== Total US$ 3 273 721 1 565 713 4 839 434 535 971 - 5 375 405 ======== 1 626 687 832 567 2 459 254 879 376 3 338 630 ======== 2 036 775 ======== 2 380 180 ======== 1 647 034 ======== The amortisation expense of intangible assets is included under operating expenditure (note 7). 56 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 27. PROPERTY AND EQUIPMENT Capital work In progress US$ Computers US$ Motor vihicles US$ Furniture & equipment US$ Freehold Land & buildings* US$ At 1 January 2017 Additions Capitalisations Revaluation gain Disposals At 31 December 2017 Additions Capitalisations Revaluation gain Disposals Reclassifications from investment properties At 31 December 2018 Accumulated depreciation At 1 January 2017 Charge for the year Disposals At January 2018 Charge for the year Disposals At 31 December 2018 Carrying amount At 31 December 2018 At 1 January 2018 At 1 January 2017 188 947 268 310 (163 541) - - 293 716 7 179 544 (309 266) - - 2 300 000 9 463 994 ======== - - - - - - - 9 463 994 ======== 293 716 ======== 188 947 ======== 3 677 901 1 598 813 163 541 - (4 930) 5 435 325 1 978 026 - - - - 7 413 351 ======== 2 203 125 563 658 (2 219) 2 764 564 843 339 - 3 607 903 3 805 448 ======== 2 670 761 ======== 1 474 776 ======== *Assets measured using the revaluation model. Measurement of fair value Fair value hierarchy 1 283 448 52 454 - (80 000) 1 255 902 123 267 - - (109 399) - 1 269 770 ======== 772 201 191 573 (25 000) 938 774 178 887 (109 399) 1 008 262 261 509 ======== 317 129 ======== 511 248 ======== 3 913 914 115 296 - - - 4 029 210 210 003 257 626 - (18 616) - 4 478 223 ======== 3 044 870 316 222 - 3 361 092 283 982 (18 616) 3 626 458 851 764 ======== 668 118 ======== 896 044 ======== 3 498 454 4 060 - 211 290 - 3 713 804 - - 139 194 - - 3 852 998 ======== 262 183 65 357 - 327 540 64 104 - 391 644 3 461 354 ======== 3 386 264 ======== 3 236 271 ======== Total US$ 12 562 664 2 038 933 - 211 290 (84 930) 14 727 957 9 490 840 (51 640) 139 194 (128 015) 2 300 000 26 478 336 ========= 6 282 378 1 136 810 (27 219) 7 391 970 1 370 312 (128 015) 8 634 267 17 844 069 ======== 7 335 988 ======== 6 280 286 ======== Immovable properties were revalued as at 31 December 2018 on the basis of valuations carried out by independent professional valuers, PMA Real Estate (Private) Limited. The valuation which conforms to International Valuation Standards, was in terms of the policy as set out in the accounting policies section. All movable assets are measured at their carrying amounts which are arrived at by the application of a depreciation charge on their cost values over the useful lives of the assets. The valuation of land and buildings was arrived by applying yield rates of 10% on rental levels of between US$3 - US$7 per square metre. The carrying cost less accumulated depreciation of the land and buildings had revaluations not been performed would be US$3 712 173 as at 31 December 2018 (2017 – US$3 801 958). Level 3 The fair value of immovable properties of US$3 461 354 (2017 - US$3 386 264) has been categorised under level 3 in the fair value hierarchy based on the inputs used for the valuation technique described below. 57 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 27. PROPERTY AND EQUIPMENT (continued) Measurement of fair value (continued) Level 3 (continued) The following shows reconciliation between the opening and closing balances for level 3 fair values: At 1 January Additions Transfers from work in progress Revaluation gain Impairment reversal Depreciation Balance at 31 December 31 December 2018 US$ 3 386 264 - - 62 533 76 661 (64 104) 3 461 354 ======== 31 December 2017 US$ 3 236 271 4 060 - 121 630 89 660 (65 357) 3 386 264 ======== Valuation technique and significant unobservable inputs The following table shows the valuation technique used in measuring the fair value of freehold land and buildings, as well as the significant unobservable inputs used. Valuation technique Significant unobservable inputs inter-relationship between key unobservable inputs and fair value measurement The Direct Comparison Method was applied on all residential properties . . Weighted average expected market rental growth (5%); Average market yield of 5%. Marketability restrictions on a specific property with a fixed purchase consideration. Occupancy rate (100%). The estimated fair value would increase /(decrease) if: expected market rental growth were ......higher/ (lower); and the risk adjusted discount rates were ......lower/ (higher). Below is an indication of the sensitivity analysis at different discount rates:- Change in rate Change in fair value +5% +3% +1% -1% -3% -5% 139 000 83 400 27 800 -27 800 -83 400 -139 000 58 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 28. INTEREST RATE REPRICING AND GAP ANALYSIS The table below analyses the Group’s interest rate risk exposure on assets and liabilities. The financial assets and financial liabilities are categorised by the earlier of contractual repricing or maturity dates. 28.1 Total position At 31 December 2018 Assets Cash and cash equivalents Current tax assets Investment securities Quoted and other investments Loans, advances and other assets Deferred tax Non-current assets held for sale Intangible assets Property and equipment Investment properties Liabilities and equity Deposits and other liabilities Redeemable ordinary shares Equity Subordinated loan Interest rate repricing gap Cumulative gap GROUP Up to 1 month US$ 1 month To 3 months US$ 3 months to 1 year US$ 1 year to 5 years US$ Non- interest bearing US$ Total US$ 112 440 912 - - - 53 031 858 - - - - - 165 472 770 - - 142 245 - 19 263 549 - - - - - 19 405 794 - - 48 693 606 - - - 68 413 583 - 31 715 609 143 942 672 - - - - - 80 409 215 212 356 255 - - - - - - 285 822 - 112 501 6 249 257 1 908 532 36 000 2 036 775 17 844 069 20 950 606 49 423 562 374 121 777 - - - 374 121 777 (208 649 007) (208 649 007) 25 835 037 - - - 25 835 037 (6 429 243) (215 078 250) 15 704 773 19 296 362 - - - - 1 505 647 - 19 296 362 17 210 420 61 112 853 195 145 835 41 180 438 (153 965 397) 12 147 334 14 335 253 64 121 413 - 90 604 000 (41 180 438) - 112 440 912 285 822 117 249 434 112 501 254 202 945 1 908 532 36 000 2 036 775 17 844 069 20 950 606 527 067 596 447 105 283 14 335 253 64 121 413 1 505 647 527 067 596 - - The table below analyses the Group’s interest rate risk exposure on assets and liabilities. The financial assets and financial liabilities are categorised by the earlier of contractual repricing or maturity dates. At 31 December 2017 GROUP Assets Cash and cash equivalents Current tax assets Investment securities Quoted and other investments Loans, advances and other assets Deferred tax Non-current assets held for sale Intangible assets Property and equipment Investment properties Liabilities and equity Deposits and other Liabilities Redeemable ordinary shares Equity Subordinated loan Interest rate repricing gap Cumulative gap Up to 1 month US$ 1 month To 3 months US$ 3 months to 1 year US$ 1 year to 5 years US$ Non- interest bearing US$ 89 553 202 - 6 150 000 - 64 466 255 - - - - - 160 169 457 279 698 410 - - - 279 698 410 (119 528 953) (119 528 953) - - 142 246 - 10 680 845 - - - - - 10 823 091 - - 9 286 322 - 13 978 560 - - - - - 23 264 882 37 746 638 - - - 37 746 638 (26 923 547) (146 452 500) 14 224 792 - - - 14 224 792 9 040 090 (137 412 410) - - 76 666 857 - 115 208 267 - - - - - 191 875 124 17 286 545 - - 1 415 904 18 702 449 173 172 675 35 760 265 - 231 007 - 117 880 6 149 294 1 204 449 36 000 2 380 180 7 335 988 18 977 000 36 431 798 7 956 124 14 335 253 49 900 686 - 72 192 063 (35 760 265) - Total US$ 89 553 202 231 007 92 245 425 117 880 210 483 221 1 204 449 36 000 2 380 180 7 335 988 18 977 000 422 564 352 356 912 509 14 335 253 49 900 686 1 415 904 422 564 352 - - 59 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 29. INTEREST RATE REPRICING AND GAP ANALYSIS (continued) The table below analyses the Group’s interest rate risk exposure on assets and liabilities denominated in United States Dollars only. The financial assets and liabilities are categorised by the earlier of contractual repricing or maturity dates. 29.1. United States dollars At 31 December 2018 GROUP Up to 1 month US$ 1 month To 3 months US$ 3 months to 1 year US$ 1 year to 5 years US$ Non- interest bearing US$ Total US$ Assets Cash and cash equivalents Current tax assets Investment securities Quoted and other investments Loans, advances and other assets Deferred tax Investment properties Intangible assets Property and equipment Non-current assets held for sale Liabilities and equity Deposits and other liabilities Redeemable ordinary shares Equity Subordinated loan Interest rate repricing gap Cumulative gap 111 524 024 - - - 52 973 247 - - - - - 164 497 271 - - 142 246 - 19 263 549 - - - - - 19 405 795 - - 48 693 606 - 31 715 609 - - - - - 80 409 215 373 527 637 - - - 373 527 637 (209 030 366) (209 030 366) 25 835 037 - - - 25 835 037 (6 429 242) (215 459 608) 19 296 362 - - - 19 296 362 61 112 853 (154 346 755) - - 68 413 582 - 143 942 672 - - - - - 212 356 254 15 704 773 - - 1 505 647 17 210 420 195 145 834 40 799 079 - 285 822 - - 6 249 257 1 908 532 20 950 606 2 036 775 17 844 069 36 000 49 311 061 12 147 333 14 335 253 64 121 413 - 90 603 999 (41 292 938) (493 859) 111 524 024 285 822 117 249 434 - 254 144 334 1 908 532 20 950 606 2 036 775 17 844 069 36 000 525 979 596 446 511 142 14 335 253 64 121 413 1 505 647 526 473 455 (493 859) - 60 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 29. INTEREST RATE REPRICING AND GAP ANALYSIS (continued) The table below analyses the Group’s interest rate risk exposure on assets and liabilities denominated in United States Dollars only. The financial assets and liabilities are categorised by the earlier of contractual repricing or maturity dates. 29.1. United States dollars At 31 December 2017 GROUP Up to 1 month US$ 1 month To 3 months US$ 3 months to 1 year US$ 1 year to 5 years US$ Non- interest bearing US$ Total US$ Assets Cash and cash equivalents Current tax assets Investment securities Quoted and other investments Loans, advances and other assets Deferred tax Investment properties Intangible assets Property and equipment Non-current assets held for sale Liabilities and equity Deposits and other liabilities Redeemable ordinary shares Equity Subordinated loan Interest rate repricing gap Cumulative gap 88 167 319 - 6 150 000 - 64 440 074 - - - - - 142 246 - 10 680 845 - - - - - 9 286 321 - - 76 666 858 - - 13 978 560 - - - 115 208 267 - - - - 231 007 - 15 533 6 149 295 1 204 449 18 977 000 2 380 180 88 167 319 231 007 92 245 425 15 533 210 457 041 1 204 449 18 977 000 2 380 180 - - - - 7 335 988 7 335 988 - 158 757 393 - 10 823 091 - 23 264 881 - 191 875 125 36 000 36 329 452 36 000 421 049 942 278 362 284 37 746 638 14 224 792 17 286 545 7 956 124 355 576 383 - - - 278 362 284 - - - 37 746 638 - - - 14 224 792 - - 1 415 904 18 702 449 14 335 253 49 900 687 - 72 192 064 (119 604 891) (119 604 891) (26 923 547) (146 528 438) 9 040 089 (137 488 349) 173 172 676 35 684 327 (35 862 612) (178 285) 14 335 253 49 900 687 1 415 904 421 228 227 (178 285) - 61 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 30. INTEREST RATE REPRICING AND GAP ANALYSIS (continued) The table below analyses the Group’s interest rate risk exposure on assets and liabilities denominated in currencies other than United States Dollars. The amounts are shown at the equivalent values in United States Dollars, the presentation currency. The financial assets and liabilities are categorised by the earlier of contractual repricing or maturity dates. 30.1. Other foreign currencies At 31 December 2018 Assets Cash and cash equivalents Quoted and other instruments Loans, advances and other assets Liabilities and equity Deposits and other liabilities Interest rate repricing gap Cumulative gap GROUP Up to 1 month US$ 1 month To 3 months US$ 3 months to 1 year US$ 1 year to 5 years US$ Non- interest bearing US$ 916 888 - 58 611 975 499 594 141 594 141 381 358 381 358 - - - - - - - 381 358 - - - - - - - - - - - 381 358 - - - 381 358 - 112 501 - 112 501 - - 112 501 493 859 Total US$ 916 888 112 501 58 611 1 088 000 594 141 594 141 493 859 - The table below analyses the Group’s interest rate risk exposure on assets and liabilities denominated in currencies other than United States Dollars. The amounts are shown at the equivalent values in United States Dollars, the presentation currency. The financial assets and liabilities are categorised by the earlier of contractual repricing or maturity dates. At 31 December 2017 Assets Cash and cash equivalents Quoted and other instruments Loans, advances and other assets Liabilities and equity Deposits and other liabilities Interest rate repricing gap Cumulative gap GROUP Up to 1 month US$ 1 month To 3 months US$ 3 months to 1 year US$ 1 year to 5 years US$ Non- interest bearing US$ Total US$ 1 385 883 - 26 181 1 412 064 1 336 126 1 336 126 75 938 75 938 - - - - - - - - - - - 75 938 - - - 75 938 - - - - - - 75 938 - 102 347 - 102 347 1 385 883 102 347 26 181 1 514 411 - - 102 347 178 285 1 336 126 1 336 126 178 285 - 62 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 31. FOREIGN EXCHANGE POSITIONS The table below indicates the currencies to which the Group had significant exposure at 31 December on all its assets and liabilities. The analysis reflects the mismatch by currency. The amounts are shown at the equivalent values in United States Dollars, the presentation currency. At 31 December 2018 Assets Cash and cash equivalents Current tax assets Investment securities Quoted and other investments Loans, advances and other assets Non-current assets held for sale Intangible assets Property and equipment Investment properties Deferred tax Liabilities and equity Deposits and other liabilities Subordinated term loan Redeemable Ordinary shares Equity Net foreign exchange Position GROUP US$ US$ RAND US$ GBP US$ EUR US$ BWP US$ Total US$ 111 524 024 285 822 117 249 434 - 254 144 334 36 000 2 036 775 17 844 069 20 950 606 1 908 532 525 979 596 446 511 142 1 505 647 14 335 253 64 121 413 526 473 455 (493 859) 571 721 - - - 19 643 - - - - - 591 364 486 176 - - - 486 176 105 188 33 012 - - - 17 - - - - - 33 029 43 440 - - - 43 440 (10 411) 285 249 - - 112 501 38 951 - - - - - 436 701 46 351 - - - 46 351 390 350 26 906 - - - - - - - - 26 906 18 174 - - - 18 174 8 732 112 440 912 285 822 117 249 434 112 501 254 202 945 36 000 2 036 775 17 844 069 20 950 606 1 908 532 527 067 596 447 105 283 1 505 647 14 335 253 64 121 413 527 067 596 - The table below indicates the currencies to which the Group had significant exposure at 31 December on all its assets and liabilities. The analysis reflects the mismatch by currency. The amounts are shown at the equivalent values in United States Dollars, the presentation currency. At 31 December 2017 Assets Cash and cash equivalents Investment securities Quoted and other investments Loans, advances and other assets Non-current assets held for sale Property and equipment Investment properties Deferred tax Current tax assets Intangible assets Liabilities and equity Deposits and other liabilities Subordinated term loan Redeemable Ordinary shares Equity Net foreign exchange Position GROUP US$ US$ RAND US$ GBP US$ EUR US$ BWP US$ Total US$ 88 167 319 92 245 425 15 533 210 457 041 36 000 7 335 988 18 977 000 1 204 449 231 007 2 380 180 421 049 942 355 576 383 1 415 904 14 335 253 49 900 687 421 228 227 (178 285) 1 234 938 - - 25 637 - - - - - - 1 260 575 1 202 268 - - - 1 202 268 58 307 29 201 - - 79 - - - - - - 29 280 52 671 - - - 52 671 (23 391) 35 963 - 102 347 235 - - - - - - 138 545 64 402 - - - 64 402 74 143 85 781 - - 229 - - - - - - 86 010 16 784 - - - 16 784 69 226 89 553 202 92 245 425 117 880 210 483 221 36 000 7 335 988 18 977 000 1 204 449 231 007 2 380 180 422 564 352 356 912 508 1 415 904 14 335 253 49 900 687 422 564 352 - 63 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 32. CONTINGENT LIABILITIES GROUP Guarantees Facilities approved but not drawn down Expected Credit losses on facilities approved but not drawn down Expected Credit losses on guarantees 2018 US$ 6 159 566 20 671 107 26 830 673 (1 520 945) (553 538) 24 756 190 2017 US$ 8 195 056 28 943 947 37 139 003 - - 37 139 003 The Group enters into various irrevocable commitments and contingent liabilities in its normal course of business in order to meet financial needs of customers. These obligations are not recognised on the statement of financial position, but contain credit risk and are therefore part of the overall risk of the Group. Guarantees commit the Group to make payments on behalf of clients in the event of a specified act. Guarantees carry the same credit risk as loans and advances to customers. Facilities approved but not drawn down represent contractual commitments to advance loans and revolving credits. These have fixed expiry dates and may expire without being drawn upon, hence total contract amounts do not necessarily represent future cash requirements. 33. CAPITAL COMMITMENTS Capital expenditure contracted for Capital expenditure authorised but not yet contracted for At 31 December 34. ASSETS UNDER CUSTODY GROUP 2018 US$ 2 931 385 9 092 999 12 024 384 2017 US$ 607 736 10 502 287 11 110 023 In 2014, the Group received Treasury Bills from the Reserve Bank of Zimbabwe amounting to US$343 058 on behalf of its Tobacco Retention Scheme customers. Half of the Treasury Bills matured in April 2018 and the other half will mature in April 2019. These Treasury Bills are currently held off balance sheet. 35. OPERATING LEASE COMMITMENTS Lease commitments Up to 1 year 1 – 5 years GROUP 2018 US$ 6 718 577 1 343 715 5 374 862 2017 US$ 4 677 890 917 578 3 760 312 Lease commitments relate to future rental commitments up to the expiry of the lease agreements. The amount of operating lease expenses recognised in profit or loss is US$1 036 349. 64 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 36. RELATED PARTIES As required by IAS 24 Related Party Disclosure, the Board’s view is that non-executive Directors, executive Directors and executive management constitute the key management of the Group. Accordingly, key management remuneration is disclosed below. 36.1 Compensation of key management personnel of the Group Short term employee benefits Post employment benefits Termination benefits GROUP 2018 US$ 1 136 941 45 950 130 000 1 312 891 36.2 Balances of loans to Directors, officers and others Loans to Directors and officers or their companies are included in advances and other accounts (note 20.1.1). Non - executive Directors Executive Directors Officers (Note 20.6) Directors' companies Officers’ companies Fair value adjustment Expected credit loss allowance 36.3 Borrowing powers Holding Company GROUP 2018 US$ - 90 036 12 115 488 - - 12 205 524 - (160 529) 12 044 995 2017 US$ 857 091 45 179 416 637 1 318 907 2017 US$ - 201 084 7 566 669 - - 7 767 753 (276 695) - 7 491 058 In terms of the existing Articles of Association, Article 102, the Directors may from time to time, at their discretion, borrow or secure the payment of any sum or sums of money for the purposes of the Company without any limitation. 37. EMPLOYEE BENEFITS 37.1 Pension Fund All eligible employees of the Group contribute to the NMB Bank Pension Fund, which is a defined contribution plan. The assets of the Pension Fund are held separately from those of the Group in funds under the control of Trustees. The pension fund assets included 914 518 shares in NMBZ Holdings Limited as at 31 December 2018. 37.2 Expense recognised in profit or loss Defined Contribution Plan - NSSA Defined Contribution Plan - NMB Bank Limited Pension Fund GROUP 2018 US$ 209 659 458 877 668 536 The expense is recognised in profit or loss as part of staff costs under operating expenses (note 7). 2017 US$ 196 169 445 002 641 171 65 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 37.3 Employee Share Option Scheme In terms of the Employee Share Option Scheme, up to a maximum of 10% of the issued share capital may be granted by the Directors to senior employees by way of options. Each set of options is exercisable at any time within a period of five years from the date the options are granted and the issue price is based on the higher of nominal value of the shares and the middle market price derived from the Zimbabwe Stock Exchange prices for the trading day immediately preceding the date of offer. The options vest immediately from date of issue and the fair value of the options is estimated at the grant date using the Black – Scholes option pricing model, taking into account the terms and conditions upon which the instruments were granted. Movements in the year The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in share options during the year Outstanding as at 1 January Lapsed Issued Exercised Outstanding as at 31 December Terms of options outstanding at 31 December 2018 GROUP and COMPANY 2018 2017 No. - - - WAEPS - - - - No. 4 128 434 (3 581 243) (547 191) - Expiry date 18 June 2022 GROUP and COMPANY Exercise price US$ 0.04 WAEPS 0.036 - - 0.036 2018 Shares - - 37.4 National Social Security Authority Scheme All employees of the Group are members of the National Social Security Authority Scheme, a defined contribution plan to which both the employer and the employees contribute. Contributions by the employer are recognised in profit or loss account and during the period amounted to US$209 659 (2017 - US$196 169). 38. EXCHANGE RATES The following exchange rates have been used to translate the foreign currency balances to United States dollars at year end: British Sterling South African Rand European Euro Botswana Pula 31 December 2018 Mid - rate 31 December 2017 Mid -rate 1. 2785 14.2254 1.1490 10.7296 1.3525 12.3250 1.1994 9.8232 GBP ZAR EUR BWP 66 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board has established the Board Asset and Liability Management Committee (ALCO) and the Board Risk and Compliance Committee, which are responsible for defining the Group’s risk universe, developing policies and monitoring implementation. The Board also has the Board Credit Committee (BCC) which is responsible for sanctioning credits and the Board Loans Review Committee (LRC), which is responsible for monitoring asset quality and adherence to the credit risk management policy. Risk management is linked logically from the level of individual transactions to the Group level. Risk management activities broadly take place simultaneously at the following different hierarchy levels: • • • Strategic Level: This involves risk management functions performed by senior management and the board of directors. It includes the definition of risk, ascertaining the Group’s risk appetite, formulating strategy and policy for managing risk and establishes adequate systems and controls to ensure overall risk remains within acceptable levels and is adequately compensated. Macro Level: It encompasses risk management within a business area or across business lines. These risk management functions are performed by middle management. Micro Level: This involves “On-the-line” risk management where risks are actually created. These are the risk management activities performed by individuals who assume risk on behalf of the organisation such as Treasury Front Office, Corporate Banking, Retail banking etc. The risk management in these areas is confined to operational procedures set by management. Risk management is premised on four (4) mutually reinforcing pillars, namely: a) adequate board and senior management oversight; b) adequate strategy, policies, procedures and limits; c) adequate risk identification, measurement, monitoring and information systems; and d) comprehensive internal controls and independent reviews. 39.1 Credit risk Credit risk is the risk that a financial contract will not be honoured 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 Group’s general credit strategies centre on sound credit granting process, diligent credit monitoring and strong loan collection and recovery. There is a separation between loan collection and recovery. There is a separation between loan granting and credit monitoring to ensure independency and effective management of the loan portfolio. The Board has put in place sanctioning committees with specific credit approval limits. The Credit Management department does the initial review of all applications before recommending them to the Executive Credit Committee and finally the Board Credit Committee depending on the loan amount. The Group has in place a Board Loans Review Committee responsible for reviewing the quality of the loan book and adequacy of loan loss provisions. The Group has an automated credit processes from loan origination, appraisal, monitoring and collections. The system has a robust loan monitoring and reporting module which is critical in managing credit risk. In view of the group’s move into the mass market, retail credit has become a key area of focus. The group has put in place robust personal loan monitoring systems and structures to mitigate retail loan delinquencies. This includes a rigorous scheme assessment and a dedicated pre-delinquency team and a separate recoveries team. Credit Management • • • • • • • • • • Responsible for evaluating & approving credit proposals from the business units. Together with business units, has primary responsibility on the quality of the loan book. Reviewing credit policy for approval by the Board Credit Committee. Reviewing business unit level credit portfolios to ascertain changes in the credit quality of individual customers or other counterparties as well as the overall portfolio and detect unusual developments. Approve initial customer internal credit grades or recommend to the Credit Committees for approval. Setting the credit risk appetite parameters. Ensure the Group adheres to limits, mandates and its credit policy. Ensure adherence to facility covenants and conditions of sanction e.g. annual audits, gearing levels, management accounts. Manage trends in asset and portfolio composition, quality and growth and non-performing loans. Manage concentration risk both in terms of single borrowers or group as well as sector concentrations and the review of such limits. Credit Monitoring and Financial Modelling • • • • • • • • Independent credit risk management. Independent on-going monitoring of individual credit and portfolios. Triggers remedial actions to protect the interests of the Group, if appropriate (e.g. in relation to deteriorated credits). Monitors the on-going development and enhancement of credit risk management across the Group. Reviews the Internal Credit Rating System. On-going championing of the Basel II methodologies across the Group. Ensures consistency in the rating processes and performs independent review of credit grades to ensure they conform to the rating standards. Confirm the appropriateness of the credit risk strategy and policy or recommends necessary revisions in response to changes/trends identified. Credit Administration • • • • • Prepares and keeps custody of all facility letters. Security registration. Safe custody of security documents. Ensures all conditions of sanction are fulfilled before allowing drawdown or limit marking. Review of credit files for documentation compliance e.g. call reports, management accounts. Recoveries The recoveries unit is responsible for all collections and ensures that the Group maximises recoveries from Non-Performing Loans ....(NPLs) and loans and advances written off. 67 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) The table below shows the maximum exposure to credit for the components of the statement of financial position. The maximum exposure is shown as gross. 39.1.2 Maximum exposure to credit risk without taking account of any collateral Cash and cash equivalents (excluding cash on hand) Investment securities Loans and advances Total Guarantees Facilities approved but not drawn down Total Total credit risk exposure Note 17 20 32 32 GROUP 2018 US$ 107 840 805 117 249 434 247 953 688 473 043 927 6 159 566 20 671 107 26 830 673 499 874 600 2017 US$ 86 729 957 92 245 425 217 154 713 396 130 095 8 195 056 28 943 947 37 139 003 433 269 098 Where financial instruments are recorded at fair value the amounts shown above represent the current risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. The effect of collateral and other risk mitigation techniques is shown in the Net Maximum Exposure column below. Where financial instruments are recorded at fair value the amounts shown above represent the current risk exposure but not the maximum risk exposure that could arise in the future as a result of changes in values. The effect of collateral and other risk mitigation techniques is shown in the Net Maximum Exposure column below. 39.1.3 Risk concentrations of maximum exposure to credit risk 31 December 2018 Gross Maximum Exposure US$ 31 December 2018 Net Maximum Exposure US$ 31 December 2017 Gross Maximum Exposure US$ 31 December 2017 Net Maximum Exposure US$ Agriculture and horticulture Conglomerates Distribution Food and beverages Individuals Manufacturing Mining Services Provision for impairment losses on loans and advances Expected credit loss on loans and advances Net exposure 37 386 857 10 692 402 28 902 108 6 304 863 100 512 291 8 731 095 703 294 69 102 116 262 335 026 16 803 048 10 692 402 3 354 895 144 087 83 361 199 1 216 383 565 260 20 852 957 136 990 231 28 531 460 9 210 926 28 737 726 10 417 745 82 589 355 8 565 178 736 466 42 216 562 211 005 418 11 444 742 9 210 926 11 484 364 1 803 969 71 150 975 2 548 024 29 465 13 727 221 121 399 686 - - (5 445 968) (5 445 968) (13 300 688) 249 034 338 (13 300 688) 123 689 543 - 205 559 450 - 115 953 718 39.1.4 Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of credit risk of the counterparty. There are guidelines regarding ...the acceptability of types of collateral. The main types of collateral obtained are guarantees, cession of debtors, mortgages over ...properties, equities, subordination of shareholder loans and promissory notes. The fair value of all collateral held by the Group at the ...reporting date is US$168 243 694 (2017 - US$158 339 808) 68 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.1.5 Credit quality per sector At 31 December 2018 Agriculture and horticulture Conglomerates Distribution Food and Beverages Individuals Manufacturing Mining Services Total At 31 December 2017 Agriculture and Horticulture Conglomerates Distribution Food and Beverage Individuals Manufacturing Mining Services Total Grade A Pass US$ 28 763 761 - 26 246 884 5 957 250 94 544 138 8 324 392 693 496 63 421 046 227 950 967 Grade B Special Mention US$ 8 478 994 - 1 442 867 347 613 3 457 816 347 740 829 479 14 904 509 Grade C Substandard US$ 108 575 10 692 402 316 760 - 2 372 861 4 482 - 1 809 390 15 304 470 Grade D Doubtful US$ - - 624 958 - 137 476 11 562 - 2 723 459 3 497 455 Grade E Loss US$ 35 527 - 270 639 - - 42 919 9 798 318 742 677 625 Total US$ 37 386 857 10 692 402 28 902 108 6 304 863 100 512 291 8 731 095 703 294 69 102 116 262 335 026 Grade A Pass US$ 26 565 020 - 24 361 189 10 386 968 74 698 442 4 905 931 159 466 33 639 650 174 716 666 Grade B Special Mention US$ 422 835 9 210 926 2 404 622 5 745 4 575 770 1 183 057 - 1 637 050 19 440 005 Grade C Substandard US$ 87 337 - 224 759 - 1 794 176 5 376 - 2 017 826 4 129 474 Grade D Doubtful US$ 1 167 963 1 319 397 25 032 1 520 967 1 255 417 565 000 4 079 308 9 933 084 Grade E Loss US$ 288 305 - 427 759 - - 1 215 397 12 000 842 728 2 786 189 Total US$ 28 531 460 9 210 926 28 737 726 10 417 745 82 589 355 8 565 178 736 466 42 216 562 211 005 418 Pass: Special Mention: Substandard: Doubtful: Loss: Refers to loans graded 1 to 3 Refers to loans graded 4 to 7 Refers to loans graded 8 Refers to loans graded 9 Refers to loans graded 10 39.1.6 Rating scale maping to IFRS 9 stages Below is a mapping table showing the link between IFRS stages and the Bank’s Rating scale: NMB Bank Rating Scale Supervisory Rating Scale IFRS 9 NMBR1 NMBR2 NMBR3 NMBR4 NMBR5 NMBR6 NMBR7 NMBR8 NMBR9 NMBR10 1 2 3 4 5 6 7 8 9 10 Stage 1 Stage 2 Stage 3 69 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.1.7 Credit quality analysis per grade Loans and advances to customers Carrying amount (note 20.1.1) 247 953 688 204 333 92 31 December 2018 US$ 31 December 2017 US$ Assets at amortised cost Individually impaired Grade 8 Grade 9 Grade 10 Gross amount Allowance for impairment Impairment Suspended interest Carrying amount Collectively impaired 1 to 5 low to fair risk 6 to 7 watch list Gross amount Allowance for impairment Impairment Suspended interest Carrying amount Total carrying amount at amortised cost 39.2 Market risk 15 304 470 3 497 455 677 625 19 479 550 (2 032 473) (1 080 650) 16 366 427 227 950 967 14 904 509 242 855 476 (11 268 215) - 231 587 261 4 129 474 9 933 084 2 786 189 16 848 747 (2 829 507) (1 225 523) 12 793 717 174 716 666 19 440 005 194 156 671 (2 616 461) - 191 540 210 247 953 688 204 333 927 This is the exposure of the Group’s on and off balance sheet positions to adverse movement in market prices resulting in a loss in earnings and capital. The market prices will range from money market (interest rate risk), foreign exchange and equity markets in which the bank operates. The Group has in place a Management Asset and Liability Committee (ALCO) which monitors market risk and recommends the appropriate levels to which the Group should be exposed at any time. Net Interest Margin is the primary measure of interest rate risk, supported by periodic stress tests to assess the Group’s ability to withstand stressed market conditions. On foreign exchange risk, the bank monitors currency mismatches and make adjustments depending on exchange rate movement forecast. The mismatches per currency are contained within 5% of the Group’s capital position. Management ALCO meets on a monthly basis and operates within the prudential guidelines and policies established by the Board ALCO. The Board ALCO is responsible for setting exposure thresholds and limits, and meets on a quarterly basis. The following table demonstrates the sensitivity to a reasonable change in interest rates, with all other variables held constant, of the Group’s statement of comprehensive income. The sensitivity of the statement of comprehensive income is the effect of the assumed changes in interest rates on the profit or loss for the year, based on the variable and fixed interest rate financial assets and liabilities held at 31 December 2018. At 31 December 2018 Sensitivity of net interest income Currency USD USD USD USD USD USD % change in interest rates % 5 3 1 -1 -3 -5 0 to 1 months US$ (10 451 518) (6 270 911) (2 090 304) 2 090 304 6 270 911 10 451 518 1 to 3 months US$ (321 462) (192 877) (64 292) 64 292 192 877 321 462 3 Months to 1 year US$ 3 055 643 1 833 386 611 129 (611 129) (1 833 386) (3 055 643) 1 year 5 years US$ 9 757 292 5 854 375 1 951 458 (1 951 458) (5 854 375) (9 757 292) Total US$ 2 039 955 1 223 973 407 991 (407 991) (1 223 973) (2 039 955) 70 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.2 Market risk (continued) At 31 December 2017 Sensitivity of net interest income Currency USD USD USD USD USD USD Increase in interest rates % 5 3 1 -1 -3 -5 0 to 1 months US$ (5 980 245) (3 588 147) (1 196 049) 1 196 049 3 588 147 5 980 245 1 to 3 months US$ (1 346 177) (807 706) (269 235) 269 235 807 706 1 346 177 3 Months to 1 year US$ 452 004 271 203 90 401 (90 401) (271 203) (452 004) 1 year 5 years US$ 8 658 634 5 195 180 1 731 727 (1 731 727) (5 195 180) (8 658 634) Total US$ 1 784 216 1 070 530 356 844 (356 844) (1 070 530) (1 784 216) 39.3 Foreign currency exchange rate risk The table below calculates the effect of a reasonable possible movement of the significant currency rate against the United States Dollar, with all other variables held constant. A negative amount in the table reflects a potential net reduction in the statement of comprehensive income or equity while a positive amount reflects a net potential increase. At 31 December 2018 ZAR ZAR ZAR ZAR ZAR ZAR At 31 December 2017 Currency ZAR ZAR ZAR ZAR ZAR ZAR % Change in currency rate Effect on profit before tax US$ 5 3 1 -1 -3 -5 % Change in currency rate 5 3 1 -1 -3 -5 (5 259) (3 156) (1 052) 1 052 3 156 5 259 Effect on profit before tax US$ 2 915 1 749 583 (583) (1 749) (2 915) Effect on equity US$ (3 905) (2 343) (781) 781 2 343 3 905 Effect on equity US$ 2 165 1 299 433 (433) (1 299) (2 165) 71 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.4 Liquidity risk Liquidity risk is the risk of financial loss arising from the inability of the Group to fund asset increases or meet obligations as they fall due without incurring unacceptable costs or losses. The Group identifies this risk through maturity profiling of assets and liabilities and assessment of expected cash flows and the availability of collateral which could be used if additional funding is required. 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 the Board ALCO. The key measure used by the bank for managing liquidity risk is the ratio of net liquid assets to deposits to customers. The Group also actively monitors its loans to deposit ratio against a set threshold in a bid to monitor and limit funding risk. The group monitors funding concentration risk by reviewing the ratio of top 20 depositors to the total funding. Funding mix is also monitored by monitoring the contribution of wholesale and demand deposits to the total funding for the bank. Liquidity risk is monitored through a daily liquidity reports produced by the Risk Management department. This is augmented by a monthly management ALCO and a quarterly board ALCO meetings. The contractual maturities of undiscounted cash flows of financial assets and liabilities are disclosed in note 28.1. The key measure used by the Group for managing liquidity risk is the ratio of net liquid assets to deposits from customers. The Group monitors its liquidity ratio in compliance with Banking Regulations to ensure that it is not less than 30% 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 Maturity profile for contingent liabilities The table below shows the contractual expiry by maturity of the Group’s contingent liabilities and facilities approved but not drawn down. At 31 December 2018 Guarantees Commitments to lend Irrevocable letters of .... credit At 31 December 2017 Guarantees Facilities approved but not . Irrevocable letters of credit drawn down On Demand US$ - - - - On Demand US$ - - - - 0 to 1 months US$ 315 250 493 836 - 809 086 0 to 1 months US$ 3 372 969 65 602 - 1 to 3 months US$ 1 250 594 875 579 - 3 Months to 1 year US$ 4 051 889 19 301 692 - 2 126 173 23 353 581 1 to 3 months US$ 184 622 418 861 - 3 Months to 1 year US$ 3 856 022 23 789 966 - 1 year 5 years US$ 541 832 - - 541 832 1 year 5 years US$ 781 443 4 669 518 - Total US$ 6 159 565 20 671 107 - 26 830 673 Total US$ 8 195 056 28 943 947 - 3 438 571 603 483 27 645 988 5 450 961 37 139 003 The Group expects that not all of the contingent liabilities or facilities approved but not drawn down will be drawn before expiry. 72 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.5 Operational risk This risk is inherent in all business activities and is the risk of loss arising from inadequate or failed internal processes, people, systems or from external events. The Group utilises monthly Key Risk Indicators to monitor operational risk in all units. Further to this, the Group has an elaborate Operational Loss reporting system in which all incidents with a material impact on the well-being of the Group are reported to risk management. The risk department conducts periodic risk assessments on all the units within the Group aimed at identifying the top risks and ways to minimise their impact. There is a Board Risk and Compliance Committee whose function is to ensure that this risk is minimised. The Risk Committee with the assistance of the internal audit function and the Risk Management department assesses the adequacy of the internal controls and makes the necessary recommendations to the Board. 39.6 Legal and compliance risk contracts, laws or Legal risk is the risk from uncertainty due to legal actions or uncertainty in the applicability or interpretation of 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, permanent relationships are maintained with firms of legal practitioners and access to legal advice is readily available to all departments. The Group has an independent compliance function which is responsible for identifying and monitoring all compliance issues and ensures the Group complies with all regulatory and statutory requirements. 39.7 Reputational risk Reputation 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 Group conducts its business. To manage this risk, the Group strictly monitors customers’ complaints, continuously train staff at all levels, conducts market surveys and periodic reviews of business practices through its Internal Audit department. The directors are satisfied with the risk management processes in the Group as these have contributed to the minimisation of losses arising from risky exposures. 39.8 Strategic risk This refers to current and prospective impact on a Group’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 Group always has a strategic plan that is adopted by the Board of Directors. Further, attainment of strategic objectives by the various departments is monitored periodically at management level. 39.9.1 Reserve Bank of Zimbabwe ratings The Reserve Bank of Zimbabwe conducted an onsite inspection on the Group’s banking subsidiary on 24 November 2016. Below are the final ratings from the onsite examination. 39.9.1 CAMELS* Ratings CAMELS Component Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Market Risk Composite Rating Latest RBS** Ratings 24/11/2016 Previous RBS Ratings 30/06/2013 2 3 3 2 3 2 3 2 4 3 2 2 2 3 Previous RBS Ratings 31/01/2008 4 2 3 3 3 3 3 73 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.9.1 Reserve Bank of Zimbabwe Ratings (continued) *CAMELS is an acronym for Capital Adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to Market Risk. CAMELS rating system uses a rating scale of 1-5, where ‘1’ is Strong, ‘2’ is Satisfactory, ‘3’ is Fair, ‘4’ is Weak and ‘5’ is Critical. **RBS stands for Risk-Based Supervision. 39.9.1.2 Summary RAS ratings RAS Component Latest RAS*** Ratings 24/11/2016 Previous RAS Ratings 30/06/2013 Previous RAS Ratings 31/01/2008 Overall Inherent Risk High Overall Risk Management Systems Acceptable Overall Composite Risk Direction of Overall Composite Risk Moderate Stable Moderate Acceptable Moderate Stable Moderate Acceptable Moderate Stable ***RAS stands for Risk Assesment System 39.9.1.3 Summary risk matrix – 24 November 2016 on - site examination Type of Risk Level of Inherent Risk Adequacy of Risk Management Systems Overall Composite Risk Direction of Overall Composite Risk Credit Liquidity High High Interest Rate Moderate Foreign Exchange Low Strategic Risk Operational Risk Moderate Moderate Legal & Compliance Moderate High Moderate Reputation Overall KEY Level of Inherent Risk Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable Acceptable High High Moderate Low Moderate Moderate Moderate Moderate Moderate Stable Stable Stable Stable Stable Stable Stable Stable Stable Low – reflects a lower than average probability of an adverse impact on a banking institution’s capital and earnings. Losses in a functional area with low inherent risk would have little negative impact on the banking institution’s overall financial condition. Moderate – could reasonably be expected to result in a loss which could be absorbed by a banking institution in the normal course of business. High – reflects a higher than average probability of potential loss. High inherent risk could reasonably be expected to result in a significant and harmful loss to the banking institution. Adequacy of Risk Management Systems Weak – risk management systems are inadequate or inappropriate given the size, complexity and risk profile of the banking institution. Institution’s risk management systems are lacking in important ways and therefore a cause of more than normal supervisory attention. The internal control systems will be lacking in important aspects particularly as indicated by continued control exceptions or by the failure to adhere to written policies and procedures. Acceptable – management of risk is largely effective but lacking to some modest degree. While the institution might be having some minor risk management weaknesses, these have been recognised and are being addressed. Management information systems are generally adequate. Strong – management effectively identifies and controls all types of risk posed by the relevant functional areas or per inherent risk. The board and senior management are active participants in managing risk and ensure appropriate policies and limits are put in place. The policies comprehensively define the bank’s risk tolerance, responsibilities and accountabilities are effectively communicated. Overall Composite Risk Low – would be assigned to low inherent risk areas. Moderate risk areas may be assigned a low composite risk where internal controls and risk management systems are strong and effectively mitigate much of the risk. 74 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) 39.9.1 Reserve Bank of Zimbabwe Ratings (continued) Moderate – risk management systems appropriately mitigates inherent risk. For a given low risk area, significant weaknesses in the risk management systems may result in a moderate composite risk assessment. On the other hand, a strong risk management system may reduce the risk so that any potential financial loss from the activity would have only a moderate negative impact on the financial condition of the organisation. High – risk management systems do not significantly mitigate the high inherent risk. Thus, the activity could potentially result in a financial loss that would have a significant impact on the bank’s overall condition. Direction of Overall Composite Risk Increasing – based on the current information, risk is expected to increase in the next 12 months. Decreasing – based on current information, risk is expected to decrease in the next 12 months. Stable – based on the current information, risk is expected to be stable in the next 12 months. 39.9.2 External Credit Ratings The external credit ratings were given by Global Credit Rating (GCR), a credit rating agency accredited with the Reserve Bank of Zimbabwe. Security class Long term 2018 BBB- 2017 BB+ The current rating expires in August 2019. 39.10 Regulatory Compliance There was no regulatory breach resulting in penalties during the period under review. The Bank is committed to comply with and adhere to all regulatory requirements. 39.11 Capital management 39.11.1Holding company The capital allocation to the subsidiary units is in accordance with the regulatory requirements of the business undertaken by the .........subsidiary. 39.11.2Banking subsidiary 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 Banking subsidiary 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 compromise not less than 50% of the capital base and portfolio provisions are limited to 1.25% of total risk weighted assets. 75 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 39. RISK MANAGEMENT (continued) The Bank’s regulatory capital position at 31 December 2018 was as follows: Share capital Share premium Retained earnings Fair value gain on investment properties Less: capital allocated for market and operational risk Credit to insiders Tier 1 capital Tier 2 capital (subject to limit as per Banking Regulations) Revaluation reserve Revaluation of Property and Equipment Subordinated debt Regulatory reserve (limited to 1.25% of risk weighted assets) Stage 1 & 2 ECL provisions – (limited to 1.25% of risk weighted assets) Portfolio provisions (limited to 1.25% of risk weighted assets) Tier 1 & 2 capital Tier 3 capital (sum of market and operational risk capital) Total capital base Total risk weighted assets Tier 1 ratio Tier 2 ratio Tier 3 ratio Total capital adequacy ratio RBZ minimum required 40. EVENTS AFTER THE REPORTING PERIOD 2018 US$ 16 506 31 474 502 47 267 030 (3 257 631) 75 500 407 (3 886 799) - 71 613 608 8 197 298 3 257 631 136 741 302 152 - 4 500 774 - 79 810 906 3 886 799 83 697 705 ========= 360 061 931 19.89% 2.28% 1.08% 23.25% 12% 2017 US$ 16 506 31 474 502 30 842 252 (1 197 871) 61 135 389 (2 918 935) - 58 216 454 5 183 773 1 197 871 90 310 477 782 2 297 492 - 1 120 318 63 400 227 2 918 935 66 319 162 ========= 273 424 840 21.29% 1.90% 1.07% 24.26% 12.00% On 20 February 2019, the Reserve Bank of Zimbabwe (RBZ) announced in its Monetary Policy Statement (MPS) that the Monetary Authorities had established an interbank foreign exchange market to formalise the buying and selling of foreign currency through the Banks and Bureaux de change. The Monetary Policy statement was followed by the issuance of Statutory Instrument 33 of 2019 (SI 33) on 22 February 2019. The Statutory Instrument introduced RTGS dollars as a legal tender in Zimbabwe and advised that the RTGS dollars at a rate of 1:1 to the USD would be used by all entities and individuals in Zimbabwe for the purposes of pricing goods and services, record debts, accounting and settlement of domestic transactions with effect from 20 February 2019. All foreign liabilities or legacy debts due to suppliers and service providers, declared dividends e.t.c shall be treated separately after registering such debts with the RBZ Exchange Control Department for the purposes of providing the Reserve Bank of Zimbabwe with sufficient information to determine an orderly expunging of these legacy debts. The Directors, based on their analysis of IFRSs, had considered the MPS of 20 February 2019 and the subsequent emergence of the USD interbank exchange rate to be an adjusting post balance sheet event in terms of International Accounting Standard 10 (IAS 10) “Events After the Reporting Period” as the developments were reflective of underlying conditions that existed at reporting date. The introduction of the RTGS$ as a currency and initial trades on 22 February 2019 at USD1: RTGS$2.5, was in the opinion of the Directors, a confirmation of a market wide practice which had recognised and accepted RTGS$ as a form of currency which was different from the United States Dollars. However, due to the limitations provided by SI 33 of 2019, these events after the reporting period have not been adjusted for as doing so would result in non-compliance with local laws and regulations. The Directors performed a sensitivity analysis on note 23.1 to illustrate the impact on the Group’s statement of financial position as at 31 December 2018 had the financial statements been restated using the first available interbank mid-rate on 22 February 2019 of USD1:RTGS$2.5. A further analysis of the impact on the statement of financial position has also been performed using the rates of USD1:RTGS$3 and USD1:RTGS$4. Assumptions In coming up with the sensitivity analysis of the Group’s Statement of Financial Position as at 31 December 2018, the Directors based the analysis on the assumptions of parity and interchangebility between the USD and RTGS balances. Furthermore, the figures on the sensitivity analysis are not reflective of the opening balances for future periods. Foreign liabilities or legacy debts, which are being registered with the RBZ for them to determine an orderly expunging of the debts, have been restated at the assumed interbank mid-rates above pending a determination by the Reserve Bank of Zimbabwe. 76 Annual Report 2018 NOTES TO THE FINANCIAL STATEMENTS(Cont’d) for the year ended 31 December 2018 40.1 SENSITIVITY ANALYSIS FOR EVENTS AFTER REPORTING PERIOD Components of reported amounts Sensitivity Analysis Monetary Assets/ Liabilities RTGS$ 80 975 16 526 297 - - 47 377 400 Non Monetary Assets/ Liabilities USD - - 136 741 - - 63 984 672 136 741 Monetary Assets/ Liabilities Nostro FCA USD - - - - - - - 14 335 253 1 505 647 - 1 505 647 78 319 925 136 741 28 953 975 - 418 151 308 - Total liabilities 28 953 975 418 151 308 Total shareholder’s ..funds and liabilities 30 459 622 496 471 233 136 741 Shareholders’ funds Share capital Capital reserves Revaluation reserve Foreign currency .translation reserve Retained earnings Total equity Redeemable ordinary . shares Subordinated term . . ..loan Total shareholders’ ..funds and ..shareholders’ ..liabilities Liabilities Deposits and other ..accounts Deferred taxation Assets Cash and cash ..equivalents Current tax ..assets Investment ..securities Loans, ..advances and ..other ..accounts Non-current ..assets held ..for sale Trade and ..other ..investments Investment ..properties Intangible ..assets Property and ..equipment Deferred ..taxation Total assets 12 692 524 99 748 388 - - 285 822 117 249 434 4 081 254 198 864 - 112 501 - - - - - - - - - Non Monetary Assets/ Liabilities RTGS$ Total USD @1:1 Total RTGS$ @1:2.5 Total RTGS$ @1:3 Total RTGS$ @1:4 - - - - - - - - - - - - - - - - - - - 80 975 16 526 297 136 741 - 47 377 400 80 975 16 526 297 341 853 9 019 802 47 377 400 80 975 16 526 297 410 223 12 026 402 47 377 400 80 975 16 526 297 546 964 18 039 603 47 377 400 64 121 413 73 346 327 76 421 297 82 571 239 14 335 253 14 335 253 14 335 253 14 335 253 1 505 647 3 764 118 4 516 941 6 022 588 79 962 313 91 445 698 95 273 491 102 929 080 447 105 283 - 490 536 246 1 219 546 505 013 233 2 262 240 533 967 208 4 347 626 447 105 283 491 755 792 507 275 473 538 314 834 527 067 596 583 201 490 602 548 964 641 243 914 112 440 912 131 479 698 137 825 960 150 518 484 285 822 285 822 285 822 285 822 117 249 434 117 249 434 117 249 434 117 249 434 254 202 945 254 209 067 254 211 107 254 215 188 36 000 90 000 108 000 144 000 112 501 281 253 337 503 450 004 - - - - - - - - - 36 000 - 13 838 490 7 112 116 20 950 606 41 708 341 48 627 586 62 466 076 - 2 036 775 2 036 775 2 036 775 2 036 775 2 036 775 12 011 354 5 832 715 17 844 069 35 861 100 41 866 777 53 878 131 12 809 106 1 908 532 473 391 040 - 25 885 844 - 14 981 606 1 908 532 527 067 596 - 583 201 490 - 602 548 964 - 641 243 914 77 HISTORICAL FIVE YEAR FINANCIAL SUMMARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2018 US$ 2017 US$ 2016 US$ 2015 US$ 2014 US$ Interest income Interest expense Net interest income Net foreign exchange gains Fee and commission income Revenue Other income 39 333 178 (8 865 016) 30 468 162 1 899 670 28 539 376 60 907 208 4 968 447 32 061 931 (9 157 095) 22 904 836 1 583 164 18 832 185 43 320 185 1 129 001 Operating income 65 875 655 44 449 186 33 860 139 (11 075 067) 22 785 072 743 255 15 179 149 38 707 476 1 737 860 40 445 336 35 761 355 (15 118 231) 20 643 124 1 416 445 20 984 694 43 044 263 1 234 125 44 278 388 Operating expenditure Impairment losses on ..financial assets measured at amortised cost Impairment losses on loans ...and advances Profit before taxation Taxation charge Profit after taxation Other comprehensive ..income, net of tax Total comprehensive ..income for the year (34 720 428) (27 578 347) (26 176 706) (26 872 649) (4 011 952) - - (3 853 149) 27 143 275 (5 922 074) 21 221 201 13 017 690 (3 078 864) 9 938 826 46 431 90 310 21 267 632 10 029 136 - (8 059 726) 6 208 904 (1 150 738) 5 058 166 (2 970) 5 055 196 - (9 496 601) 7 909 138 (2 422 040) 5 487 098 2 970 5 490 068 31 072 461 (12 651 519) 18 420 942 1 822 432 15 121 536 35 364 910 62 025 35 426 935 (27 984 051) - (5 017 362) 2 425 522 (768 455) 1 657 067 10 180 1 667 247 78 Annual Report 2018 HISTORICAL FIVE YEAR FINANCIAL SUMMARY CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 2018 US$ 2017 US$ 2016 US$ 2015 US$ 2014 US$ 80 975 64 040 438 64 121 413 1 505 647 78 751 49 821 935 49 900 686 1 415 904 78 598 39 771 065 39 849 663 1 415 490 78 598 34 715 869 34 794 467 1 414 144 78 598 29 225 801 29 304 399 1 407 964 14 335 253 14 335 253 14 335 253 14 335 253 14 335 253 79 962 313 65 651 843 55 600 406 50 543 253 45 047 616 447 105 283 356 912 509 265 384 520 283 287 243 241 001 418 527 067 596 422 564 352 320 984 926 333 831 107 286 049 034 112 440 912 117 249 434 - 1 908 532 285 822 89 553 202 92 245 425 - 1 204 449 231 007 69 421 257 24 744 752 - 2 264 907 368 445 63 439 347 14 547 992 - 1 905 116 23 075 54 750 561 3 874 525 4 614 047 2 784 594 1 436 974 254 202 945 210 483 221 199 617 095 235 088 981 203 363 052 36 000 - 112 501 20 950 606 17 844 069 2 036 775 36 000 15 533 102 347 18 977 000 7 335 988 2 380 180 2 261 300 88 650 88 930 14 202 270 6 280 286 1 647 034 2 264 300 68 220 77 805 8 125 800 6 601 086 1 689 385 2 267 300 127 291 81 390 4 453 300 6 345 267 1 950 733 527 067 596 422 564 352 320 984 926 333 831 107 286 049 034 Share capital Reserves Total equity Subordinated loan Redeemable ordinary ..shares Total shareholders’ ..funds and ..shareholders’ ..liabilities LIABILITIES Deposits and other ..liabilities Capital employed ASSETS Cash and cash ..equivalents Investments securities Investments in ..debentures Deferred tax assets Current tax assets Loans, advances and ..other assets Non-current assets ..held for sale Quoted and other ..investments Trade investments Investment properties Property and ..equipment Intangible assets Employment of ..capital 79 HISTORICAL FIVE YEAR FINANCIAL SUMMARY CLOSING NUMBER OF SHARES Share performance 2018 2017 2016 2015 2014 US$ 392 955 196* 384 974 542 384 427 351 384 427 351 384 427 351 Net asset value per share (US cents) 19.98 16.69 Basic earnings per share (US cents) Dividend per share (US cents) Dividend cover (times) Price/earnings ratio Closing price per share (US cents) 5.43 0.96 5.65 4.42 24 2.58 0.36 7.17 3.49 9 14.46 1.32 - - 2.97 3.9 12.78 1.43 - 2.5 3.5 11.72 0.43 - - 10.47 4.5 Market capitalisation (US$) 94 309 247 34 647 709 14 992 667 13 454 952 17 299 224 Financial performance Return on shareholders’ funds (%) Return on assets (%) Cost/net income ratio (%) Non-interest income/total income (%) Effective tax rate (%) 27.03 4.03 58.8 47.37 21.85 15.28 2.37 70.7 40.1 23.7 9.1 1.6 84.6 43.7 18 10.9 1.7 82.1 53.8 30 3 0.6 92.8 35.4 31.68 1. 2. The return on shareholders’ funds is based on shareholders’ funds at the end of the year. Includes charge for impairment of losses on loans and advances. * The number of shares in issue increased by 7 980 654 shares from the ordinary shares issued to existing shareholders in March 2018 as scrip dividend. At an Extraordinary General Meeting held on 19 February 2014, the Company approved a share consolidation exercise at a ratio of 10:1 and consolidated 3 500 000 000 (3.5 billion) shares with a nominal value of US$0.000028 per share to 350 000 000 (350 million) shares with a nominal value of US$0.00028 per share. The Company also approved an increase in the authorized share capital from 350 000 000 shares with a nominal value of US$0.00028 per share to 600 000 000 shares with a nominal value US$0.00028 per share. 80 Annual Report 2018 NOTICE TO MEMBERS Notice is hereby given that the 24th Annual General Meeting of Members of NMBZ Holdings Limited will be held at the Registered Office of the Company at 4th Floor, Unity Court, Corner 1st Street/ Kwame Nkrumah Avenue, Harare on Thursday, 23 May 2019 at 1500 hours for the following purposes: ORDINARY BUSINESS 1. 2. 3. 4. 5. To receive and adopt the Financial Statements for the year ended 31 December 2018, together with the reports of the Directors and Auditors thereon. To re-appoint Directors. In accordance with the Articles of Association, Messrs. C. Chikaura and J. de la Fargue retire by rotation. Being eligible, the Directors offer themselves for re-election. To approve Directors’ fees for the year ended 31 December 2018. To approve Messrs Ernst & Young’s remuneration for the year ended 31 December 2018. To appoint Ernst & Young as the Company’s Auditors for the year ending 31 December 2019. SPECIAL BUSINESS SPECIAL RESOLUTION 1. To consider, and if deemed fit, to pass, with or without modification, the resolution set out below: “That the Company, being duly authorised thereto by Article 10 of its Articles of Association, may undertake general repurchases by way of open market transactions on the Zimbabwe Stock Exchange (“ZSE”) of any of its own ordinary shares in such manner or on such terms as the directors may from time to time determine provided that: a. b. c. the maximum number of shares authorised to be acquired is no more than 10% of the Company's ordinary issued share capital. for each share, the minimum price shall not be lower than the nominal value of the Company’s shares and the maximum price that may be paid is 5% above the weighted average market price for the ordinary shares in the Company as derived from the Zimbabwe Stock Exchange (ZSE) Daily Price Sheet for the five business days immediately preceding the date on which such ordinary shares are contracted to be purchased. the authority in terms of this special resolution shall unless renewed prior to such time, expire on the first anniversary of this resolution or at the conclusion of the next Annual General Meeting of the Company, whichever is later, save that the Company, may before such expiry, enter into a contract or contracts to purchase its ordinary shares which would or might be completed wholly or partly after the expiry and may purchase its ordinary shares in pursuance of such contract or contracts. 2. To consider, and if deemed fit, to pass, with or without modification, the resolution set out below: That the Articles of Association of the Company be amended by the substitution of Article 2.10 in its entirety by the following Article: “2.10 “in writing” and “written” means communication transmitted by letter, by telecopier, by e-mail or by any other means of electronic communication provided the relevant message or document is legible and reproducible” TAKING NOTE OF THE RESIGNATION OF MR ERIK SANDERSEN AS DIRECTOR Mr. Erik Sandersen, appointed as a Director on 13th August 2015 resigned as Director with effect from 24 January 2019. Notes: A member of the company entitled to attend and vote at this meeting is entitled to appoint a proxy to attend, speak and on a poll, vote in his/her stead. A proxy need not be a member of the company. Proxy forms should be forwarded to the Registered Office of the company at least 48 hours before the commencement of the meeting. A Special Resolution is required to be passed by a majority of seventy five per cent of those present and voting (including proxy votes), representing not less than twenty five per cent of the total number of votes in the Company. Please be advised that the Annual Report can be accessed on the company’s website: www.nmbz.co.zw 1. 2. 3. By Order of the Board MISS. S. I. PASHAPA COMPANY SECRETARY 26 April 2019 81 EXPLANATIONS REGARDING THE NOTICE OF THE ANNUAL GENERAL MEETING NMBZ HOLDINGS LIMITED EXPLANATIONS REGARDING THE NOTICE OF THE ANNUAL GENERAL MEETING Resolution 1 The Directors of the Company are obliged to present their Report and Accounts to shareholders of the Company at an Annual General meeting. This is a standard form of resolution common to all Annual General Meetings. Resolution 2 The Company’s Articles of Association require one third of the Directors to stand down at each Annual General Meeting and if they are eligible, they may offer themselves for re-election. The Directors standing down are Messrs C. Chikaura and J. de la Fargue. Both retiring Directors, being eligible, offer themselves for re-election. Information about these Directors is shown below: Charles Chikaura – Independent Non-Executive Director (Deputy Chairman) Charles Chikaura is an independent non-executive director who was appointed to the NMBZ Holdings and NMB Bank Limited boards on 24 December 2015. Charles holds a Bachelor of Arts Honours degree and a Masters in Business Administration degree from the University of Zimbabwe as well as an Institute of Bankers diploma. Charles has 35 years of banking experience, of which 23 of these were with the Reserve Bank of Zimbabwe where he held several positions including Manager Exchange Control, General Manager Operations, Senior General Manager and Deputy Governor. Charles was thereafter appointed Chief Executive Officer of the Infrastructure Development Bank of Zimbabwe a position he held for 12 years. Charles is retired and is a full time farmer. James de la Fargue – Non-Executive Director James de la Fargue represents African Century on the Board. He is a holder of a BA Business Organisation (Herrit-Watt University), ACCA, Diplomas in Marketing & Marketing Research and a Certificate in General Agriculture. James worked for a number of international organizations including Deloitte & Touché Management Consultants, Unilever PLC and Chargeurs SA. He is a former president of the Zimbabwe Tobacco Association and worked at MBCA as a senior executive in charge of Corporate Finance. James was involved in business consultancy work and management of an integrated farm in Centenary from 1998 to 2008. Since 2009, James has been with African Century Limited where he initially consulted for the group and later took up a position as Business Development Director of African Century Financial Holdings and as Executive Chairman of Frango King. He currently is the Chief Executive Officer of Lake Harvest, the largest tilapia farming operation in Africa. Resolution 3 Shareholders are requested to approve Director’s fees. The Directors’ fees for 2018 amounted to $219,246. Resolution 4 The Remuneration of the auditors is required to be fixed by the Company in a General meeting in terms of section 150 (6) of the Companies Act [Chapter 24:20]. Accordingly, Members will be requested to approve the remuneration paid to the external auditors of Messrs Ernst & Young for the year ended 31 December 2018, which audit fee has been disclosed in the Annual Report. Resolution 5 All public companies are required to appoint Auditors at each Annual General Meeting at which Financial Statements are presented, to hold office until the next such meeting in terms of section 150 (2) of the Companies Act [Chapter 24:03]. This resolution therefore proposes the appointment of auditors in accordance with usual practice and the Banking Act [Chapter 24:20]. Special Resolution 1 The directors are seeking authority to allow the use of the Company's available cash resources to purchase its own shares in the market in terms of the Companies Act and the regulations of the ZSE. The directors will only exercise the authority if they believe that to do so would be in the best interests of shareholders generally. In exercising this authority, the directors will duly take into account following such repurchase for the next 12 months, the ability of the Company to pay its debts in the ordinary course of business, the maintenance of an excess of assets over liabilities, and for the Company and Group, the adequacy of ordinary capital and reserves as well as working capital. Special Resolution 2 The proposed amendment to the Articles of Association will consider electronic communication with shareholders as acceptable under written notice. This will authorize the Company to communicate with its shareholders using any electronic means. Note of Resignation of Mr Erik Sandersen In terms of Section 187(7) of the Companies Act [24:03] and Article 82 of the Articles of Association of the Company, Members of the Company must be advised of the resignation of a director. 82 Annual Report 2018 SHAREHOLDERS’ ANALYSIS Size of shareholding 0 - 5000 5,001 - 10,000 10,001 - 50,000 50,001 - 100,000 100,001 - 500,000 500,001 - 1,000,000 1,000,001 - 10,000,000 10,000,001 and above Total Size of shareholding 0 - 5000 5,001 - 10,000 10,001 - 50,000 50,001 - 100,000 100,001 - 500,000 500,001 - 1,000,000 1,000,001 - 10,000,000 10,000,001 and above Total Industry Bank Local Companies Employee Deceased Estates External Companies Fund Managers Insurance Companies Investment Trusts And Property Local Residents Nominees Local Non Residents Non Resident Individuals Other Corporate Holdings Pension Fund Total 2018 Number of shareholders % of Holders 2018 Issued Shares % Shareholding 3,548 96 135 37 51 14 20 10 3,911 90.72% 2.45% 3.45% 0.95% 1.30% 0.36% 0.51% 0.26% 100% 2,080,774 688,250 3,016,655 2,656,213 12,397,260 9,519,354 59,391,130 303,205,560 392,955 196 0.53 % 0.18 % 0.77 % 0.68 % 3.15 % 2.42 % 15.11 % 77.16% 100% 2017 Number of shareholders % of Holders 2017 Issued Shares % Shareholding 3,519 101 128 29 35 7 17 11 3,847 91% 2.63% 3.33% 0.75% 0.91% 0.18% 0.44% 0.29% 100% 2,107,243 729,794 2,841,009 2,192,721 7,939,960 5,170,377 54,044,324 309,949,114 384,974,542 0.55 % 0.19 % 0.74 % 0.57 % 2.06 % 1.34 % 14.04 % 80.51% 100% 2018 Shareholders % of shareholders Shares % of Shares 2 317 241 3 7 3 10 36 3,105 52 6 52 3 74 3,911 0.05% 8.11% 6.16% 0.08% 0.18% 0.08% 0.26% 0.92% 79.39% 1.33% 0.15% 1.33% 0.08% 1.89% 100% 19,190 45,257,473 763,073 2,229 102,731,670 2,510 57,862,905 38,947,458 8,108,774 2,885,497 108,333,243 1,749,643 3,369 26,288,162 392,955,196 0.00% 11.52% 0.19% 0.00% 26.14 % 0.00% 14.73% 9.91% 2.06% 0.73% 27.57% 0.45% 0.00% 6.69% 100% 83 SHAREHOLDERS’ ANALYSIS Industry Bank Local Companies Employee Deceased Estates External Companies Fund Managers Insurance Companies Investment Trusts And Property Local Residents Nominees Local Non Residents Non Resident Individuals Other Corporate Holdings Pension Fund Total 2017 Shareholders % of shareholders 2 330 245 3 7 5 10 33 3,085 54 7 39 3 24 3,847 0.05% 8.58% 6.37% 0.08% 0.18% 0.13% 0.26% 0.86% 80.19% 1.40% 0.18% 1.01% 0.08% 0.62% 100% Shares 19,190 47,641,337 1,157,690 2,221 99,123,436 4,710 55,622,266 49,870,592 7,885,162 1,409,361 108,290,425 1,075,414 3,369 12,869,369 384,974,542 % of Shares 0.00% 12.38% 0.30% 0.00% 25.75% 0.00% 14.45% 12.95% 2.05% 0.37% 28.13% 0.28% 0.00% 3.34% 100% Rank Shareholder 2018 Number of Shares % Shareholding 1 2 3 4 5 6 7 8 9 African Century Financial Investments Ltd ARISE BV Africinvest Financial Sector Holding Old Mutual Life Assurance Company of Zimbabwe Limited Old Mutual Zimbabwe Limited Lalibela Limited Alsace Trust Cornerstone Trust Drakmore Investments (Private) Limited 10 Martcap Investments (Private) Limited TOTAL 73,771,114 69,142,858 35,427,111 30,219,348 27,619,798 22,301,656 16,885,381 16,875,582 10,962,712 7,728,231 310,933,791 18.77% 17.60% 9.02% 7.69% 7.03% 5.68% 4.30% 4.29% 2.79% 1.97 % 79.13% Rank Shareholder 2017 Number of Shares % Shareholding 1 2 3 4 5 6 7 8 9 African Century Financial Investments Ltd ARISE BV Africinvest Financial Sector Holding Old Mutual Life Assurance Company of Zimbabwe Limited Old Mutual Zimbabwe Limited Lalibela Limited Alsace Trust Cornerstone Trust Wamambo Investments Trust 10 Drakmore Investments (Private) Limited TOTAL 71,207,639 69,142,858 34,571,429 28,674,073 26,557,498 21,526,695 16,885,381 16,875,582 13,545,247 10,962,712 309,949,114 18.50% 17.96% 8.98% 7.45% 6.90% 5.59% 4.39% 4.38% 3.52% 2.85% 80.51% 84 Annual Report 2018 SHAREHOLDERS’ INFORMATION MEMBERS’ DIARY Financial year end Reports:- - Announcement of annual results - Annual financial statements posted to shareholders - Annual General Meeting - Announcement of the 2019 half-year results 31 December 2018 April 2019 April 2019 23 May 2019 August 2019 85 SECRETARY AND REGISTERED OFFICE Company Secretary S. I. PASHAPA Registered Offices 4th Floor Unity Court Corner 1st/ Kwame Nkrumah Avenue Harare Zimbabwe Telephone: +263 242 759651-9 / 759601-6 Facsimile +263 242 759648 Website: http://www.nmbz.co.zw Email: enquiries@nmbz.co.zw Auditors Ernst & Young Chartered Accountants (Zimbabwe) 1st floor, Angwa City Corner Angwa Street / Kwame Nkrumah Avenue Harare Zimbabwe Transfer Secretaries In Zimbabwe First Transfer Secretaries 1 Armagh Avenue Eastlea Harare Zimbabwe Legal Advisors In Zimbabwe Gill, Godlonton & Gerrans 7th Floor, Beverley Court 100 Nelson Mandela Avenue Harare Zimbabwe NMB Centre Corner George Silundika Avenue/ Leopold Takawira Street Bulawayo Zimbabwe +263 29 270169 +263 29 268535 In UK Computershare Investor Services PLC The Pavilion Bridgewater Road Bristol BS599 6ZZ United Kingdom In UK Dechert LLP 160 Queen Victoria Street London EC4V 4QQ United Kingdom 86 Annual Report 2018 Annual General Meeting Form Of Proxy NMBZ HOLDINGS LIMITED ANNUAL GENERAL MEETING FORM OF PROXY I/We, ……………………………………………………....………………..………………………………...….…...................................................... of ……………………………………..……………………………………………………………….…………......................................................….. being a member of the above company and entitled to vote, hereby appoint ……………………………………………………………………………………………..……………………......................................................…… of …………………………………………….…………………………………...…………..……………...….…........................................................ or failing him …………………………………………………………………………………………..…………….……………...….…...................... of ……………………………………………………………………………………………………………………....................................................... or failing him, the Chairman of the meeting as my/our proxy to vote for me/us on my/our behalf at the ANNUAL GENERAL MEETING of the Company to be held on 23 May 2019 at 1500 hours and at any adjournment thereof. Signed this …………..……….........................………………….. day of …………….........................……………………………………….2019 Signature of member ……………………………………………………………………………………………….................................................... Note (i) In terms of Section 129 of the Companies Act (Chapter 24:03) a member of the company is entitled to appoint one or more proxies to act in the alternative to attend, vote and speak in his stead. A proxy need not be a member of the Company. (ii)Sections 75 and 76 of the Company’s Articles of Association provide that instruments of proxy must be signed and returned to reach the Registered Office of the Company not less than forty-eight hours before the time for holding the meeting. 87