No ‘Loan Abuses’ at Zemen Bank
This letter comes as a response to your recent story headlined “Zemen Bank Laying Foundations Amidst Turmoil” [Vol.17 Number,851, August 21,2016]. The viewpoints presented in the article are grossly biased and misinformed.
First, the article quotes a few shareholders’ views that some loans were allegedly given without any credit appraisal. This is just simply false. Each and every loan application is subject to a full and proper credit evaluation, involving multiple individuals and approval layers.
Second, the article refers to a figure of 150 million Br worth of loans, as if these were cases involving Board or management improprieties, these were not. The figure quoted, (which can be seen in the Bank’s audited annual report of FY 2013/14, page 27) is actually the total amount of funds that the bank set aside for general loan provisions and for three specific loans that were written off by the Bank over two years. It is common practice for banks to either write-off or provision for the bad loans and for borrowers having trouble making loan repayments. In Zemen Bank’s case, out of the thousands of loans given by the Bank since its establishment eight years ago, it is just three loans that have been written off to date — a number that would not be unusual for many other private banks over a similar time period. And even the few loans that are fully written off continue to be subject to continuous legal follow-up. Assuming that those funds are forever lost is mistaken. For any shareholder or observer to single out just one part of a bank’s expenses, while ignoring a bank’s overall cost-income structure and ultimate profitability, is deliberately misleading: provisions have averaged 1.9pc of outstanding loans over the years and, even counting such provisions, Zemen Bank has regularly registered among the lowest cost-to-income ratios in the industry, allowing it to generate rising profits and high shareholder returns.
Third, the article refers to four court cases mentioned by the shareholders and implies that these are targeting the Bank’s Board or its managers. In fact, the court cases are simply the legal cases that Zemen Bank has brought against the defaulting borrowers. Three of the four loan cases have resulted in judgments in favour of Zemen Bank and the fourth is undergoing a separate outside-of-court bankruptcy procedure, through which the bank will recover funds when assets are disposed.
Fourthly, the granting of clean (non-collateralised) loans is presented as some sign of misconduct, when this is simply not the case. As is known quite well to Zemen Bank’s shareholders, the Bank has from its very start had a business model that was open to providing clean loans to customers. This practice is neither illegal nor a violation of Central Bank policy. Such clean loans (which are only a small share of total loans) involve a slightly higher level of risk than the traditional collateral-based lending, but Zemen Bank’s record clearly shows that such a risk was also compensated by a higher than normal shareholder return.
Finally, it’s disappointing that Fortune reported and anonymously quoted the perspective of a few shareholders without seeking alternative views from the rest of the Bank’s 3,300 shareholders. The vast majority of shareholders are actually very satisfied with Zemen Bank’s overall performance, and are particularly pleased with the successful record of growth, profitability and high shareholder returns registered since the bank’s establishment (including an earnings per share record that has been among the highest in the industry and has averaged 44pc a year over the past five years).
While a few shareholders have in the past rightly and justifiably raised concerns about the rise in bad loans faced in one particular fiscal year, the Bank has worked constructively to address those concerns by making changes (several years ago) to improve its credit systems and to reduce its reliance on clean loans. Thus, the article does a truly great disservice to the Bank by failing to present a balanced perspective of the past credit challenges within the context of the Bank’s very positive overall record for its customers, for its shareholders and for the broader banking industry.y.