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Retail and Branch Banking CBE Branches’ Economic Profitability Analysis NOVEMBER 2023
1. Introduction • what are the bases for Branch Establishment: • Feasibility Study forwarded from Districts • Society or local administration request • Branch Establishment Procedure • NBE Directive But so far CBE did not exercise branch optimization or profitability analysis after establishment • What are the basic metrics for profitability: Macro (Corporate) level; • Return on Asset (ROA); • Return on Equity (ROE); • Net Interest Margin (NIM) • Operational profit, Etc.
1. Introduction Micro (Branch) level • We could not apply corporate level metrics for the following reasons. • Branches performance needs to be considered beyond the PL position (Financial inclusion) • Single branches balance sheet is unbalanced (some may be deposit substantial or others loan substantial) • Contribution for the branch network (inter branch Txn) • The need to consider forgone or gained benefits and implicit costs.
2. Objective, Methodology & Scope Objective • Mainly to indicate optimality of CBE branch network. Specifically; • Assess CBE branches economic profit holistically; • Indicate main source of economic profit/loss; • Propose possible intervention; • Set possible considerations; and • Forward practical recommendations/improvement plan.
2. Objective . Cont. ………… Methodology • Both financialand non financial metrics were used; • Financial data from IM & Finance • Average yield rate was applied on loanable funds and FCY collected • Income and expenses in Head Office, Regional and District office books were cascaded to cost centres (HO, IBS & Branches) • Loanable fund was determined net of 20% liquidity reserve requirement of CBE • Operational expense (salary & benefit and general expense) of all cost centre were adjusted per their contribution for the network
2. Objective . Cont. ………… Scope • All Branches opened before June 30, 2023 were included; • All Branches less <=2 years were excluded from optimization plan; • All branches under former Mekele District were also excluded from optimization; • Gondar = 16 branches • Mekele = 57 branches (all) • Shire = 43 branches (all) • Semera = 3 branches
Branches cont. … Evaluation Metrics • Economic Profitability • The consultant (Mckyinsey & Co) recommended to optimize branches footprint based on their performance (economic profit) • CBE has exercised economic profitability analysis since 2019 but it did not take any intervention action so far • Other consideration (Txn volume, deposit per account, economic efficiency, distance)
Branch. Cont. … How Branches Economic Profit determined? • Consider forgone benefits and implicit cost • Determine cost centres • Determine bases for income calculation, expense and income allocation • Apply income transfer and cost sharing rate/percentile • Generate Total economic Income and Expense
Branch. Cont. … • Income (Revenue): • Remove Interest income from branches book; • Transfer income forloanable fund contribution • Income from FCY based on FCY collection & payment contribution • Commission and charges (non FCY related) • Gain on FCY dealing (market deal) • Other incomes
Branch. Cont. … • Expense (Cost): • Interest expense • Non-Interest Expense (salary & benefit and general expenses) Shared from HO, Districts and Regions • Adjusted operational Expense (salary & benefits and general expense) (+/- Txn contribution to the network = Txn cost * No. Txn +/-) • Loss on FCY deal (market deal)
Branch. Cont. … Standard Setting: • Income Distribution criteria
Branch. Cont. … • Expense Distribution criteria
Branch. Cont. … • Income transfer rate for loanable fund
Branch. Cont. … • Transfer rate for FX related income;
Branch. Cont. … • Opex Adjustment Rate
Branch. Cont. … • Final Result
Branch. Cont. … Top 20 economic loss making Branches (12.16%)
Branch. Cont. … Top 20 economic loss making Branches (14%)
Branch. Cont. … Top 20 economic loss making Branches (9.47%)
Branch. Cont. … Top 20 economic profit making Branches (12.16%)
Branch. Cont. … Top 20 economic profit making Branches (14%)
Branch. Cont. … Top 20 economic profit making Branches (9.47%)
Branch. Cont. … Major causes for branches loss: • From the revenue side: • Low fund transfer income (Due to low deposit) • Low non- interest income (Due to heavy Txn users) • Low FCY related income (Due to low FCY earned) • From the cost side: • High interest expense (High cost bearing deposit) • High amount of operating expense (High overhead cost/unproductive expenditure) • High number of in branch transaction with free service
Thresholds for Optimization Thresholds (Consolidation) • Economic loss incurring Branch; • Age of Branch > 2 years; • Transaction per annum <= 167,00 (net work average); • Average deposit per account <= 12,800 (50% of the corporate); • Minimum deposit amount for three years <= 90 million; and • Operational efficiency >= 1.33 (at least failed to cover 75% cost). Considerations • Distance from near by branch >= 5 kilo meter; • Branch in remote area (not additional branch); and • Branch size (> Grade –II).
Thresholds, Opt. cont. … Optimization Model (3 Archetype) • Transforming • Economic loss; • High revenue and high transaction; or • Low revenue and high transaction. • Reformatting • Economic loss; and • High revenue and low transaction • Consolidation • Economic loss; and • Low revenue and low transaction (< Network average =44.10 million & 167,000).
Thresholds, Opt. cont. … Possible innervation • Transforming • Squeeze & enhance staff productivity. • Migrate in branch transaction; • Enhance sales effectiveness; • Increase share of non-interest bearing deposits; and • Reformatting • Increase share of non-interest bearing deposits; • Regrading branch downwards or Re-propose.
Thresholds, Opt. cont. … Consolidation • Squeeze & enhance staff productivity. • Migrate in branch transaction; • Enhance sales effectiveness; • Increase share of non-interest bearing deposits; • Dawn grade or repurpose the branch; • Consolidate.
Thresholds, Opt. cont. … Expected Revenue/Resource (Total Economic Expense/Total Revenue = 1 (Equibrum)
Thresholds, Opt. cont. … Prioritization plan • Start with high economic loss making branches (41 Branches; 2 per city District and 1 per outlying Districts); • proceed with next higher economic loss making Branches (346 Branches, all under Central Region and 10 branches per outlying Districts); • The remaining Branches(569 branches); • Start with transforming, proceed to reformatting and finally consolidation. • Starting from July 01, 2024 and onwards, we will take action (Reformatting & Consolidation)
Proposal & Recommendation Proposal • Provide targets based on indicative potential and enforce branches to fill their deficit • Apply appropriate optimization archetype on all economical loss making branches starting from this date onwards.
Proposal & Recommendation Recommendation • Prior optimizations of all economical loss making Branches > 2yrs (956 branches) • Immediate implementation of an effective cost and revenue management system across all CBE branches • Endorsed by EMC on November 06, 2023.
Action Plan • The action plan will be finalized up to end of this week and communicated to all actors.
