Flash Report / Bangladesh

Grameenphone: Final payment for injunction; fresh dialogue on audit claim likely

  • The second and final installment of BDT10bn (USD117.6mn) paid to BTRC to continue injunction against non-issuance of NOC
  • The regulator seems willing to resolve the audit dispute through dialogue
  • We expect GP to resume its usual dividend payment

Grameenphone (GP) paid the second and final installment of BDT10bn (USD117.6mn) to the Bangladesh Telecommunication Regulatory Commission (BTRC), according to reports. The court demanded BDT20bn (USD235.3mn, c16% of audit claim) from GP in November 2019 when the company applied for an injunction against the non-issuance of a no-objection certificate (NOC). The regulator stopped issuing this certificate to GP to persuade them to pay the audit dispute claim.

We expect to see a fresh discussion on the audit disputeThis payment to the BTRC does not solve the audit dispute, rather it provides an opportunity to restart the negotiation process. Before the payments, the regulator seemed reluctant to start any discussion. After GP made the first payment, the regulator eased its stance and started issuing NOCs. Now that GP has made the last payment, we expect the regulator to take the initiative to review the audit dispute and resolve it. Meanwhile, GP is considering the payment not as an expense, but as a deposit adjustable with the final audit claim settlement.

Please note that there is a separate litigation on the BTRC Audit, which is pending at the lower court. The next court date is scheduled on 21 July 2020. This litigation will continue in parallel with the expected negotiation with the regulator.

BTRC to review the significant market participant (SMP) guideline. The High Court declared BTRC’s previous SMP directives illegal on 15 December 2019. The regulator then formed a new committee to review the SMP guideline. Once the committee drafts the guideline, GP will have 15 days to communicate its observation on the guideline. After assessing the observations, the regulator will complete the SMP guideline.

We expect GP to resume its usual dividend payment. GP took a dividend cut in 2019 to counterbalance the BDT20bn payment to the BTRC. The payment is now complete and we expect GP to resume its usual dividend payment in 2020.


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Flash Report / Nigeria

Nigeria banks hit by another central bank debit; we see a pattern!

  • Debit comes days before the CBN’s FX auction, suggesting that the CBN is trying to limit the banks' FX demand
  • FCMB, UBA and FBNH continue to be the most vulnerable; although UBA was not hit by this recent debit
  • Cost of funds and lending costs are expected to rise on account of this, counteracting the MPR cut we saw last month
Nkemdilim Nwadialor @
Tellimer Research
23 June 2020

The Central Bank of Nigeria (CBN) is at it again. It has debited 26 banks a total of NGN216.1bn, attributed to the CRR (Cash Reserve Ratio) compliance requirement. Recall that two weeks ago, the CBN debited banks cNGN459.7bn for the same purpose.

This is the third CBN debit in 2020, bring the total CBN debits for the year to NGN2.08tn: 1) CRR and LDR infringements in April 2020 of NGN1.4tn; 2) another CRR debit of NGN460bn; and now 3) the most recent CRR debits of NGN216bn.

CBN penalties for Nigeria Banks so far this year

Our usual suspects FBNH and Zenith have been on the receiving end of all three central bank penalties in 2020. FBNH has had 4% of its deposits (using Q1 20 figures) debited YTD, while the figure is a bit higher for Zenith at 5%.

CBN debits also serving as quasi capital controls

This latest CRR debit comes days before the CBN’s foreign exchange auction (as with the last two CBN debits) which suggests a pattern to these otherwise spurious debits. Speaking with the banks, we get the sense that the CBN is trying to discourage them from making huge demands at the FX auctions, so by making their available balances smaller, they limit the banks’ ability to pressure the CBN on the FX front. A recent article by Business Day puts Nigeria’s FX backlog at US$7bn, which combined with failing reserves (now at US$36bn, down by US$9bn year to date) make a compelling argument for the banks’ claims of FX shortage. The Naira has since depreciated to NGN386.5 at the I&E window and NGN455 to the US dollar on the parallel market.

We maintain our Buy recommendations on seven of the eight Nigerian bank stocks in our coverage, the exception being FCMB where we have a Hold. We will be revisiting our earnings forecasts and equity valuation to incorporate the increased operating pressure and regulatory risks.


 
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Macro Analysis / Bangladesh

Bangladesh Bank relaxes CRR requirement to improve liquidity

  • 200bps reduction in CRR requirement for offshore banking operation (OBO) unit will free cBDT4bn and lower funding costs
  • NBFIs also got policy support as CRR requirement reduced by 100bps; however, total SLR requirement unchanged at 5%
  • Non-listed companies income or sale repatriation made easier; interest rebate for good borrowers withdrawn
S. M. Galibur Rahman @
IDLC Securities
24 June 2020

Bangladesh Bank (BB), the central bank, has decreased the cash reserve ratio (CRR) by 200bps for the offshore banking operation (OBO) of scheduled banks. Now, the biweekly CRR is set at 2% from an earlier level of 4% and daily CRR is 1.5% from the previous 3.5% of the average total demand and time liabilities (ATDTL) for OBO. This new guideline will be effective from 1 July 2020. This 1.5% reduction will free up approximately BDT4.0bn.

Besides, banks now can mobilise a maximum of 30% of their regulatory capital from their domestic operations to offshore banking operations. Previously, the limit was 20%. Please note that OBUs can also accept foreign currency deposits from enterprises operating in Export Processing Zone (EPZ), Economic Zone (EZ), and High-tech parks, natural and juristic persons (legal entity) not residents in Bangladesh.

BB has also reduced the CRR requirement by 100bps to 1.5% for NBFIs. However, the total SLR requirement (including CRR) is still at 5%. Hence, the SLR requirement increased to 3.5% from earlier 2.5%. The total released amount due to this lower CRR will be approximately BDT3.5bn. Theoretically, there shouldn’t be any improvement in market liquidity but most of NBFIs already have more than regulatory required (SLR) investment in treasury bonds. Thus, NBFIs will have the option to use this free fund in lending activities as well.

There were few other circulars from BB in recent times which are discussed below.

Relaxed repatriation of income or sales proceeds from sales of non-listed shares relaxed

Bangladesh Bank has simplified and relaxed some regulations regarding the repatriation of the sales proceeds of non-resident equity investment in non-listed companies (both public and private). These relaxations will make the repatriation process faster for non-resident foreign investors.

From now on, for sales proceeds of such investment, Authorized Dealers (ADs) have the following options:

  • No need for any prior approval or valuation report from independent valuers for repatriation up to BDT 10mn. Earlier the limit was BDT 1mn.

  • No restriction on repatriation of any amount if fair value is based on net asset value (NAV). However, it has to be ensured that NAV has no revalued assets, intangible assets, expenses/losses shown as an asset.

  • No restriction in remitting more than BDT10mn to BDT100mn worth of foreign currency (if fair value is based on asset value, market value or discounted cash flow basis as prescribed by BB) and submit post-facto reports within 30 days.

This relaxed classification policy is to help the business recover from the current ongoing pandemic. However, it might create liquidity pressure in the banking sector going forward.

Interest rebate for good borrowers withdrawn  

Since 9% interest cap has been implemented in April 2020, the regulator has withdrawn the monetary incentive of interest rebate for good borrowers. However, they will receive the rebate (at least 10%) for the period from October 2018 to September 2019 (12-month period). A good borrower selection period has also been changed to December of each year from September previously. 

'Good borrowers' were previously eligible for at least a 10% rebate on the last 12 months’ paid interest. Those who have unclassified status for the last four quarters for all loans ie satisfactory payment history in the last 12 months are selected as good borrowers.


 
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Flash Report - Equity / Kenya

Safaricom, KCB & Co-op Bank lose out as Kenya extends its Covid policy measures

  • CBK has extended its Covid mitigation measures on e-transactions to December 2020, from 30 June previously
  • No restriction on the number of zero-rated transfers a user can make each day
  • We believe the extension of the fee waivers will increase the incidence of bank to e-wallet transactions
Tracy Kivunyu @
Tellimer Research
25 June 2020

The Central Bank of Kenya (CBK) has extended its Covid mitigation measures for e-payments by six months to December 2020. CBK had waived transaction fees on all person-to-person (P2P) transfers below KES1,000 and doubled the daily transaction limit to KES300,000, as part of the government’s Covid-19 policy response. The regulator had also waived transfer fees between mobile money wallets (e-wallets) and banks. These measures were initially enforceable from 16 March to 30 June.

Impact on Safaricom and banks

The extended measures include no restriction on the number of zero-rated transfers a user can make each day (before 16 March, transfers up to KES100 were zero-rated, restricted to a maximum of three transactions per day). We therefore expect a sustained negative impact from arbitrage (customers making multiple KES1,000 transactions to avoid costs incurred in the KES1,001-10,000 transaction band).

From our analysis of CBK data on mobile money transactions, as at 10 May, the proportion of revenue-generating transactions for P2P transfers had reduced to 74%, from 98% pre-Covid. Transaction value also dropped 5% during the same period, exacerbating the impact on revenue.

In our analysis of CBK data on bank and e-wallet transactions up to 10 May 2020, we noted that bank transactions tended to increase in the larger transaction bands, which mainly are business to business (B2B) and business to customer (B2C) transactions. We believe the extension of the fee waivers will increase the incidence of bank to e-wallet transactions. In our view, we expect this to be the last extension of the fee waiver but expect the higher transaction limits to be maintained.


 
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Macro Analysis / Bangladesh

Bangladesh budget: Government eyes telcos and tobacco to increase revenue

  • Government declared a US$66.8bn budget with 8.2% GDP growth target; deficit to be 6% of GDP
  • Plans to collect 7-8% more revenue from telcos and tobacco companies through tariff hike
  • US$12.1bn stimulus packages will help quick economic recovery; export and remittance incentives will continue this year
S. M. Galibur Rahman @
IDLC Securities
12 June 2020

FY 21 budget expects 8.2% GDP growth, keeping the budget deficit within 6.0%.  The Finance Minister has announced the national budget worth BDT5.68 trillion (USD66.8bn) with a targeted GDP growth of 8.2% for FY 21 (compared to a provisional estimate of 5.2% of FY20). This budget is 13.2% higher than the prior year’s revised budget of BDT5.01 trillion (USD 59.01bn). The government has set a revenue collection target of BDT 3.78 trillion (USD 44.5bn) leaving a budget deficit of BDT 1.9 trillion (USD 22.4bn), 6.0% of GDP. Of this amount, BDT 1.1 trillion (USD 12.9bn) will be financed from domestic sources, and BDT 760 billion (USD 8.9bn) will be financed from overseas sources. Financing from overseas sources will be 44.2% higher than FY20 revised budget while financing from domestic sources will be 13% higher.

On domestic financing, the Government targets 68% higher NSC sales of BDT 200 billion (USD 2.4bn) compared to the revised budget target. However, it is 26% lower than the initial FY20 budget number. This leaves the government to target 3.1% higher bank borrowing of BDT 849.8 billion (USD 10.0bn) over the revised budget for FY20. However, it is 80% higher than the initial budget of FY20.

Tariff hike in tobacco and telcoms to generate revenue. The FY21 revenue target is c9% higher than the revised budget of FY20. To achieve the target, the budget proposes c6% tariff hike for cigarettes and 20%+ for bidi and other tobacco products. The budget also proposes Supplementary Duty (SD) increase (from 10% to 15%) for all telecom services. Tobacco and Telecom sectors together contribute 19-20% of the government’s revenue. The proposed tariff hike suggests 7-8% increase in revenue collection from these two sources.  

US$12.1bn stimulus package declared earlier to facilitate quick recovery; incentives for remittance and RMG to continue: During the last two months, the government declared BDT 1.0tn (USD12.1bn) stimulus package to revive the economy. Bangladesh experienced 66-days (March 26-May 30) general holidays amid the corona pandemic which resulted in a substantial slowdown in economic activities. Effective implementation of these stimulus packages could result in quick economic recovery. Also, a 2% incentive on money remitted (remittance) by Bangladeshi expatriates will continue in this financial year. Besides, RMG will continue to enjoy all cash incentives and reduced tax rates.

Lower debt to GDP ratio is a blessing amid the pandemic: Bangladesh’s total debt to GDP is only 34% of GDP where foreign debt is only 12.5% of total GDP. This is giving the government the flexibility to take a substantial loan to implement a mammoth budget. It is expected that revenue growth will be slow amid pandemic. Hence, the government is relying more on both domestic and foreign loans.

More investment opportunity for undisclosed money: Undisclosed money (black money) can be invested in the stock market by paying a 10% tax in FY21 also. However, there is a 3-years lock-in condition. Besides, black money can be invested in real-estate or can also be kept as cash, bank deposits, or national savings certificate (NSC) by paying a 10% tax on that. There will be no further scrutinization on that amount.

Reduction in corporate tax for non-listed companies and an increase in tax-free income limit for individuals: The government proposed a reduction of 2.5% tax rate for non-listed companies except for financials, telco, and tobacco companies. Besides, tax-free limit income for individuals has been increased by BDT 50,000 to BDT 300,000.


 
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