Diamond deal dents Stanchart profits
Brian Benza | Friday April 8, 2016 18:00
Although the bank did not reveal the identity of the client, industry sources told BusinessWeek that about $7 million (P77 million) of the total impairment charge can be attributed to Motiganz Diamond Company Botswana. Motiganz’s cashflow is hampered by the purchase of a huge multi-million dollar rough stone, which it now finds difficult to sell in the current depressed market.
Stanchart gives credit lines to finance De Beers’ sights and reports say Motiganz used part of its credit line to purchase the stone, which is now part of the bank’s collateral.
The diamond company, like many others, is facing liquidity issues because of large stocks, protracted close to zero profitability, and a serious downturn in the market.
Stanchart has full collateral on the debt and, according to market sources, the provision by Standard Chartered is just but a prudent cautionary measure as Motiganz is currently in good standing with the bank and does not owe on interest payments.
“Motiganz Botswana bought a big rough stone worth several millions of dollars. They were able to do a marvelous job cutting it and it yielded two large and a few smaller stones. These large stones alone must be worth some $3m to $4m each.
“However, in this current market it sometimes may take a few years to sell very large and expensive goods. If you have a $7m worth of stones, which is financed at six percent that means $35,000 per month just for interest payment. How many years can you ‘sit’ on such stones?” said an executive with a local sightholder firm.
While Standard Chartered’s precautionary move has dragged down its profit after tax to below that of competitor, Stanbic Bank’s for the first time, banking industry analysts say it does not mean that the bank has ‘lost’ the entire impairment.
The banking industry insider is of the opinion that when these stones are finally sold, Stanchart will get its money back and that will become ‘new income’ – and look good on the bank’s profit and loss account.
Motiganz is one of the companies that retrenched workers last year as viability was significantly affected by high rough prices against lower polished prices leading to indigestion in the diamond pipeline.
Over 10 of the 21 local sightholders in Botswana retrenched staff leading to the industry shedding about 1,500 workers.
According to Stanchart, despite the huge impairment in 2015, the quality of its loan portfolio remained strong in 2015.
“Without the significant specific impairment of a single client on the corporate side, the ratio of impaired loans to total gross loans would have been 1.02 percent.
“In the year the balance sheet remained resilient with three percent growth,” read a statement accompanying the bank’s 2015 results.
The bank says it is also strongly capitalised with capital adequacy ratio at 19.8 percent from 16.1 percent in the previous year. Efforts to get a comment on the impairment from the bank or the diamond firm were futile.
The banking sector in Botswana is adjusting to what has been characterised as the new normal, which is an environment of low interest rates and sluggish economic growth.
On the international space, along with ABN Amro Bank NV, Standard Chartered UK is one of the biggest lenders to middlemen in the diamond industry.
But last month Bloomberg reported that after lending about $2 billion to the industry, the London-based bank is asking diamond-processing clients to get payment insurance or provide 100 percent collateral.