Cavmont Capital Holdings Zambia Plc · 03 Group Profile & Structure Cavmont Bank Ltd as a subsidary...

02 Cavmont Capital Holdings Zambia PlcAnnual Report For the year ended 30 June 2019

Group profile and structure

Key performance indicators

Board of directors

Corporate governance report

Corporate social responsibility

Directors’ report

Statement of directors’ responsibilities

Report of the independent auditor

Annual Financial statements:

Consolidated Statement of profit or loss and other comprehensive income

Consolidated statement of financial position

Company statement of financial position

Consolidated statement of changes in equity

Company statement of changes in equity

Consolidated statement of cash flows

Notes to the consolidated financial statements

Appendix

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Table of Contents

03

Group Profile & StructureCavmont Bank Ltd as a subsidary of Cavmont Capital Holdings Zambia PLC (CCHZ) is a Registered Commercial bank in Zambia with approximately 47,000 active accounts and 228 employees as at the time of this report following a major restructure of the bank. Cavmont Bank was established on 1st January 2004, following a merger between existing financial institutions Cavmont Merchant Bank Ltd, (Inc. October 1992), and New Capital Bank Plc., (Inc. June 1992).

Effective 1st January, 2017, Capricorn Investment Group Limited (“Capricorn Group”) obtained 97% of the direct and indirect shareholding of Cavmont Capital Holdings Zambia PLC (“CCHZ”) from Capricorn Investment Holdings (CIH) and others.

Capricorn Investment Group Limited (an investment holding company listed on the Namibian Stock Exchange) with 100% of the share capital of Bank Gaborone, and 97% of Lusaka Stock Exchange (LuSE) listed CCHZ.

In 2006 Cavmont Capital Holdings Zambia Plc (CCHZ), sought a strategic investment partner and identified Capricorn Investment Holdings Limited (CIH). CIH acquired a 44.2% shareholding in CCHZ in 2007.

Discussions held with the Bank of Zambia to find an acceptable manner to recapitalize Cavmont Bank through a rights issue by CCHZ were concluded successfully, with CIH underwriting the rights issue. Consequently, CCHZ raised additional share capital of more than K15.4 billion in 2007 and the repositioning of Cavmont Bank commenced.

CCHZ owns 100% of Cavmont Bank Limited.

The transfer of the shareholding in CCHZ from CIH to Capricorn Group has brought added clarity and alignment to the existing group structure, which already includes the following entities: Cavmont Bank, Bank Gaborone and Bank Windhoek. Bank Windhoek is the second largest bank in Namibia with 55 Branches, 265 ATMs, and an asset base of $2.3bn and periodically ranked in the Top 100 Banks in Africa.

Cavmont Bank is a fully capitalised, liquid and stable local financial service provider with a solid, unsolicited investment-grade “A- Credit Rating” by the Credit Rating Agency Zambia Limited (CRA) committed to serving the Zambian market and supporting strong economic growth through the provision of bespoke solutions for all sectors.

Shareholding


Vision & Mission

Cavmont Bank Branch Network

Products & Services

Cavmont Bank’s vision is to be a world-class bank rated amongst the best in Zambia with a focus on partnering with all its stakeholders.

Cavmont aims to meet the demands of the local market.

Cavmont Bank seeks to reposition and rebuild its brand to stand out as a symbol of accessible, convenient & reliable banking and provide an unparalleled first-class customer service experience that more than meets the needs of its customers.

Cavmont Bank provides a range of corporate, retail and community banking services.

As part of Capricorn Investment Group Limited, Cavmont Bank has adopted ‘The Capricorn Way’ which will align business cultures across entities in the Group.

The Group has an established, diversified business portfolio in Namibia and Botswana.

As at the time of this report

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Summary of

Key Performance Indicators



Board of Directors

Mr Guy D. Z. Phiri Independent Non-Executive Director

Mr Christiaan Petrus De VriesNon-Executive Director,Appointed 4th October 2019

Mr Thinus Prinsloo CCHZ Chairman

CAVMONT CAPITAL HOLDINGS ZAMBIA PLC

Mr Petrus van der Walt

Managing Director

07

Governance and Leadership

CORPORATE GOVERNANCE REPORT

CCHZ is committed to the principles of sound corporate governance, which are characterised by discipline, transparency, independence, accountability, responsibility, fairness and social responsibility. By subscribing to these principles, CCHZ believes that all stakeholders’ interests are promoted, including the creation of long-term shareholder value.

The board is responsible for establishing effective leadership, ethical practices and ensuring appropriate application of governance practices and principles contained in the applicable Corporate Governance Codes and Directives.

The board has been setting the tone in creating an ethical culture through a CCHZ risk appetite statement that includes elements specifically related to ethical risk. Operational risk priorities include building an effective risk culture to support dynamic risk management.

Key Board practices and activities focus on:

• open and rigorous discussion

• active participation

• consensus in decision-making independent thinking and alternative views

• reliable and timely information

The board provides oversight and ensures sustainability by approving a clear strategy linked to performance objectives and targets. To achieve good performance as an outcome, the board evaluates its own performance, including the board committees and ensures that remuneration is linked to the achievement of performance targets.

Effective control is embedded in the governance structures in the Company. The board follows a structured approach to meetings supported by a timely flow of documents to ensure that the oversight responsibilities of the board are carried out effectively.


Board of Directors

The board plays a pivotal role in the Company’s corporate governance system. An overriding principle with regard to the board’s deliberations and approach to corporate governance is that of intellectual honesty.

An important role of the board is to define the purpose of the Company and its values, which constitute its organisational behaviour and the norms to achieve its purpose. Both the purpose and values are considered to be clear, concise and achievable. The board, as constituted by the Companies Act, is governed by the Board charter which was reviewed in 2016. The purpose of this charter is to regulate how business is to be conducted by the board in accordance with the principles of sound corporate governance. The Charter also sets out the specific responsibilities to be discharged by the board members collectively and is the key document by which the Board is governed.

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Cavmont Bank

Njavwa Mulwanda Independent Non- Executive Director

Board of DirectorsAs at the time of this report

Marthinus Johannes Prinsloo Non- Executive Director

Victoria Charlotte Dean Independent Non- Executive Director

Guy David Zingalume Phiri Independent Non –Executive Chairman

Christiaan Petrus De Vries Non- Executive Director

Nico Johannes van der Merwe Non - Executive Director

Peet Johannes van der Walt Managing Director


Cavmont Bank

Mrs Rita Mapara-Ndhlovu Head Legal & Compliance / Company Secretary

Executive Management Team



Managing DirectorMizimo Musokotwane

Chief Financial Officer

Manyando Sikanda Chief Operating Officer

Mudenda Syamujaye Head Corporate & Treasury

Kalimukwa Kalimukwa Head Risk

Isililo Mzyece Chief Credit Officer

Milimo Silenga Head Human Resources

Chilunga Chill Puta Dunham Head Communications & Customer Service

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Economic Overview

Agriculture output contracted by more than 35% due to a shortfall in rain in early 2018 with a further reduction during the reporting period. Copper production continued to increase by an estimated 4%– 4.5% in 2018. Construction also contributed to growth, due to public infrastructure projects and investment in commercial buildings and residential housing which increased at an estimated 10% in 2018.

The Zambian economy was showing signs of strain, due to both domestic and external challenges. The below average rainfall, impacting both power supply and the agriculture sector continued into 2018/19. Furthermore, the increased cost of production, caused by disrupted operations and rising operating costs, was ultimately passed onto the consumer and dampened spending power. While the value of copper remained subdued during 2016 it did show signs of recovery in 2017, with the upside of improved LME price on our key export commodity in 2018, beginning to stoke slow economic recovery process. Copper prices have remained resilient in the first half of 2019 with signs of reducing due to the slowdown in global economic performance.

High capital investment, high debt servicing cost, and a large wage bill have contributed to fiscal deficits, which peaked at 9.3% of GDP in 2015 before declining to 7.8% in 2017 and 7.1% in 2018, thanks to a fiscal consolidation program. However, the 2018 deficit still missed its target, 6.1% of GDP, due mainly to high capital spending, rising debt servicing, and growing arrears. The fiscal deficit will remain a challenge in 2019 with positive results from the consolidation program expected in 2020 onwards

The debt-to-GDP ratio increased from 25% of GDP to 61% between 2012 and 2016, raising concern. In 2018, domestic debt was an estimated 20% of GDP while external debt, including government guarantees, fell to an estimated 39.2% of GDP. High public and publicly guaranteed debt led to Zambia being classified as being at high risk of debt distress in 2017.

Inflation increased to approximately 7.6% in 2018 from 6.6% in 2017. The relative price stability led the central bank to reduce the policy rate from 15.5% to 9.75% in February 2018. Average Bank lending rates rose to 24.6% in Mar 2019 from 23.6% in Dec 2018; Range of lending rates on new large loans widened to 10.3%-34.5% from 10.0-28.0%) in December. Gross international reserves continued to fall from $2.4 billion in 2016 to $2.1 billion in 2017 and were an estimated $1.7 billion by the end of 2018, corresponding to 2.5 months of imports.

It is expected that the policy rate will gradually increase in 2019 due to elevated inflationary pressure whilst gross international reserves will continue to reduce due to high interest payments on foreign debt induced by the depreciating local currency.

Financial overview

The Group showed a strong recovery from the loss before tax position of K50.3 million in 2018 down to K16. 6 million loss before tax for the 2019 financial reporting period which represents a 67% reduction in the loss incurred in the prior year.

There is a focus on selective growth to improve the overall quality of the

statement of financial position, while particular attention will be paid to operational efficiencies and recoveries and rehabilitation of non-performing loans.

Good Governance

Good governance is at the core of the operations of Cavmont Capital Holdings LSE (“CCHZ”). Although the risk culture is now accurate, corrective action had to be taken, and as a result significant provisions were required on non-performing loans (NPLs) as well as operational losses incurred. Cavmont Bank’s present day risk culture is defined by the insight driven business decisions and strategic activities which we have adopted over the last few years. Undoubtedly, making the right judgments.

In 2018/2019, we embedded a positive and responsive risk culture in the Business. Our fundamental belief is that every colleague is a risk manager, each understanding the risks involved in their day-to-day procedures. This has allowed us to grow while managing the inherent risks of our industry. The Board will continue to ensure that the Bank conducts its business in an ethical, legal and transparent manner for the benefit of all stakeholders

Investment

Cavmont Bank Limited is a wholly owned subsidiary of CCHZ. The performance of CCHZ is directly arrived from the performance of Cavmont Bank Limited. The balance of this report will deal with the performance of Cavmont Bank Limited.

Strategic Growth Initiatives

Cavmont Bank successfully launched the Touch and Go USSD Mobile Banking solution in July 2018.

Instant debit cards were launched early in 2019 with the result of improved efficiencies when new accounts are opened at Cavmont Bank.

Towards the end of the financial year, Cavmont Bank embarked on a program to optimize the sustainable performance of the Bank. This project sets out to improve efficiencies, create capacity for growth and to become more responsive to market needs. This resulted in the restructuring of The Bank. The biggest component of the restructure was to re-define the branch and operations structures as the foundation to improve customer service and increase efficiencies in July 2019.

The back office processes were re-engineered to advance productivity as well as greatly reducing the turnaround times for various customer processes. This process was introduced towards the end of the financial year and early indications are that the steps taken will produce amazing benefits for all Cavmont Bank customers.

The CCHZ Board Chairman’s Report


Human Resources

Cavmont Bank is committed to employing the right talent by ensuring that it consistently builds a performance orientated team through retaining, developing and attracting the right talent both from within and outside the industry.

Cavmont Bank colleagues understand the importance of the success of the business and its customers, this vision is driven by their full participation through their skills, attitude, performance as well as potential. The Board stands resolute behind the commitment to continuing to raise the bar when it comes to Cavmont Bank’s unique and inclusive employee culture and ensuring an ongoing focus on building talent for the future. Cavmont Bank continues to build on the culture of being “a connector of positive change”.

Leadership Change

We are pleased to announce the appointment of Mr Peet van der Walt as the Managing Director of Cavmont Bank Ltd with effect from 19 March 2019, after having acted in the same capacity since 1 July 2018. Peet van der Walt is a veteran banker who holds a B.Comm degree from North West University as well a B.Acc Honours degree and an M.Comm from the same University.

He is a Chartered Accountant (SA) and has extensive experience in the area of banking and consulting. He began his career as Chief Financial Officer of Merchant Bank (SA) and in 1999 moved to First National Bank (SA). He has filled various roles at FNB notably as the CEO of the metropolitan branch network and from 2004 to 2008 he was personal Banking CEO. He has widespread experience handling change and in shaping and implementation of turn-around and growth strategies for substantial businesses.

Strengthened Team

In 2019 the subsidiary welcomed one new board member, Christiaan Petrus (Christo) De Vries. Christo has over 40 years Commercial Banking experience of which 12 years were at Executive Management level and

11 years at Executive Director level. He served as Managing Director of National Bank of Commerce in Tanzania from 2004 to 2010 and Managing Director of Bank Windhoek Holdings as well as Bank Windhoek Ltd in Namibia from 2011 to 2016. From 2016 he has served as Non-Executive Director of Cavmont Bank Ltd since November 2016. His extensive banking experience renders him an invaluable member to the Board.

Strategic Focus

Cavmont Bank will continue to focus and expanding its reach in the Corporate, Commercial and Business segments through a team of dedicated Relationship Managers. Success in the Treasury Department will be supported by further growth.

The reconfigured Branch network will increase the penetration of its defined consumer segments as well as small and micro enterprises

In Closure

I wish to thank the Board of Directors and Executive Management Team of CCHZ and its subsidiary for their selfless contribution to CCHZ and Cavmont Bank Ltd. The result of their dedication and hard work is definitely beginning to produce desired results.

Mr Thinus Prinsloo

CCHZ Board Chairman

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Improvement of results

The past year was very busy for Cavmont Bank as the project to steer the Bank to long term profitability took off. For the year ended 30 June 2019, Cavmont Bank recorded a loss before tax of K 16.59 million, although not the desired result, still a significant improvement on the loss recorded in the previous year.

All aspects of the Bank were assessed as part of the turnaround strategy. During the initial period of refocus and change, the Treasury Business unit expanded their customer base and earned revenue of K 36 million which exceeded budget by 97%.

Towards the end of the 2019 financial year, Cavmont Bank embarked on a defined phase to improve the sustainable performance of the Bank, which resulted in a restructure of Cavmont Bank. This project will run into the new financial year and will lead to the enhancement of customer service while introducing efficiencies.

The focus on personal loans led to the launch of an improved personal loan offering which increased the growth of the Bank’s portfolio. This solution was launched under the “This could be you” personal loan campaign.

A resilient team

The 2018 / 2019 financial year saw the coming together of an Executive Leadership Team that will ensure the future growth of Cavmont Bank.

Training interventions were increased and additional colleagues were exposed to formal training interventions.

Staying the course

During the year under review, a strong emphasis was placed on implementing initiatives across the Bank to support the vision of delivering sustainable revenue in the medium term.

Many of these initiatives are showing a positive contribution to the performance of Cavmont Bank and will contribute to long term success.

A substantial investment was made to improving digital and technology solutions. Upgrades on the system and data network were implemented.

A future filled with possibility

The programme to create sustainable performance, is gathering momentum. The restructure of Cavmont Bank will be bedded down in the first half of the 2020 financial year.

In closing

I wish to express my appreciation to all our stakeholders, especially the colleagues of Cavmont Bank, that all played a critical role in contributing to an improved performance. I look forward to the positives that will come out of the changes made over the past year and I am confident that the turnaround for Cavmont Bank is now truly evident.

Sincerely,


Managing Director

Message by the

Managing Director


Background Statement

The Cavmont Bank Limited (CBL) Board has embraced King IV and supports the shift to an outcomes based approach to governance,

where remuneration contributes to positive outcomes for all stakeholders.

This report reflects our journey towards the full application of remuneration disclosures as required by King IV and gives an overview of the Bank’s remuneration philosophy and policy and its implementation during the 2019 financial year. The Bank strives for appropriate transparency of its executive remuneration policies and practices and presents a three part report. The first part of the report contains background and context to the Bank’s remuneration approach and governance, part two focuses on the forward looking remuneration policy and the actual implementation of our policy in part three. This allows shareholders to observe the way the actual policy translates into actual outcomes for senior management and executives

Governance of Remuneration

Remuneration is governed by REMCO and Board HR Committee. Executive Directors attend Committee Meetings by invitation and recuse themselves when matters are discussed that concern them.

The REMCO and Board HR Committee confirm that they have discharged the functions and complied with their terms of reference for the year ended 30 June 2019. The key activities and recommendations of the REMCO and BHRC regarding remuneration during the year included:

• Consideration and approval of annual total guaranteed pay increases

• Approval of appointments and remuneration for all executive directors

• Approval of executive organizational structural changes

Overview of the CBL remuneration policy

The CBL Remuneration and Reward Policy aims to ensure that individuals with the necessary skills and competencies are attracted and retained by the Bank. The policy aims to create fair and equitable practices in terms of employee remuneration.

In setting remuneration levels, the Board Human Resources and Remuneration Committees take appropriate market benchmarks into account, while ensuring that sufficient emphasis is placed on pay for performance.

REMUNERATION REPORT

Elements of Pay

Implementation Report

Fixed Remuneration and Benefits

Basic Salary The fixed elements of remuneration is referred to as basic salary or total guaranteed pay(TGP)

Benefits Benefits include membership of pension funds, medical aid, preferential interest rates on loans, housing, car, phone or other allowances depending on the job level.

Company contributions are calculated as part of the employee’s costs to company.

Variable Remuneration

Short Term Incentive Plan

The CBL policy provides for a short term incentive plan. Designed to

• Retain key staff by providing fair reward for exceptional performance,

• Ensure differentiation based on performance with appropriate award.

Any payments made under the plan must be considered in the context of affordability to CBL and these guidelines will be reviewed regularly to ensure compliance with this principle.

Long Term Incentive plan

The CBL policy provides for a Long term incentive plan. Designed to attract retain and reward selected employees who can contribute to the trade of the group and to stimulate the personal involvement

Key management remuneration 2019 2018

Salaries and other short-term employment benefits 15,289 10,315

Termination Benefits and Statutory contributions 1,388 393

16,677 10,708

The Short Term and Long Term Incentive guidelines for the bank are still being developed for approval and implementation. As such no Short Term or Long Term Incentives were paid out for Key management during the past year.

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CorporateSocialResponsibility

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Cavmont Bank embraces Corporate Social Responsibility (CSR)

ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2019

CAVMONT CAPITAL HOLDINGS ZAMBIA ZAMBIA PLC

Cavmont Bank embraces Corporate Social Responsibility (CSR)

Notable 2018/2019 CSR Activities

The Cavmont Bank Corporate Social Responsibility programme (CSR), guided by the CCHZ and Capricorn Group framework supports various approved sponsorships and CSR platforms through monetary, time bound and professional resources.

The programme although run by the Communications and Customer Service Department (CCS) is a bank-wide initiative that is very specific to branches / departments and the areas they represent.

Cavmont currently supports 17 community schools around the country. These schools are either not funded by the Government and in most instances were created and supported by well-wishers or charitable organizations.

1. Women & Youth Day Sponsorships - Women & Youth

In honour of Women’s Day, Industrial Branch visited Faith Baptist School for the hearing Impaired and provided food and educational goods. The school has approximately 100 students.

2. University Teaching Hospital (UTH) Christmas lunch:

Cavmont, in partnership with St Ignatius Church and other organisations brought some Christmas cheer to the women and children of the University Teaching Hospital by treated them to a lovely Christmas lunch.

3. Women’s National Netball Team

Cavmont continues to support the National Women’s Netball team as part of our focus on Women Empowerment. We supported the team in Africa Netball World Cup Qualifiers tournament held in Lusaka. The event had an estimated attendance of over 300,000 local and international spectators.

4. Charity Golf Tournament Sport/ Vulnerable in society:

The Golf day aimed to support projects promoted by church groups that target the needy and disadvantaged in society beyond any boundaries.

5. Pink Friday- Cancer Awareness:

Our primary objective is to help Cancer Patients that face challenges in accessing medical assistance. Customers’ and colleagues donated any amount to receive a cupcake. The funds were given to the Cancer Society.

6. Financial Literacy programme

The Bank participated in Financial Literacy Week driven by the Central Bank focussing on the unbanked. As a continuation of this initiative Cavmont Bank continues spreading the financial message through the weekly Smart Money Show that reaches over 6 million radio listeners and nearly 200,000 Facebook Live viewers.


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Cavmont Change Makers


Director’s Report FOR THE YEAR ENDED 30 JUNE 2019

18 ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2019


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Directors’ ReportThe Directors submit their consolidated audited annual financial statements for the year ended 30 June 2019, which disclose the state of affairs of Cavmont Capital Holdings Zambia Plc (“the Company”) and its subsidiary Cavmont Bank Limited (“the Bank”) (together “the Group”).

PRINCIPAL ACTIVITIES

The principal activity of the Company is that of an investment holding company. There have been no significant changes in the Company’s business during the year and the principal activities of the subsidiary remains the provision of commercial banking and related services. The Bank had 16 branches and 4 agencies as at 30 June 2019. As at the time of this report, there are now 13 branches , 3 agencies and 1 Corporate service centre.

SHARE CAPITAL AND BENEFICAL OWNER(S)

The authorised share capital of the Group remained unchanged at 135 million ordinary “A” shares of K0.001 each. The issued and fully paid-up

The Company shareholding and beneficial ownership is represented as follows:

There were no changes in the beneficial owner(s) during the year.

Name of shareholder Percentage of shareholding

Beneficial Owner(s)

1 Capricorn Investment Group Limited 49.8% Capricorn Investment Group Limited

2 Makumbi Investment ltd 48.1% Capricorn Investment Group Limited

3 Cavmont & Co. SA. 0.5% Cavmont & Co. SA.

4 National Pension Scheme Authority 0.5% National Pension Scheme Authority

5 White Barry Howard 0.2% White Barry Howard

6 Madison Pension Trust Fund 0.1% Madison Pension Trust Fund

7 Charles Mpundu 0.1% Charles Mpundu

8 CEC Pension Trust Scheme 0.1% CEC Pension Trust Scheme

9 Airtel Zambia Pension Trust Scheme 0.1% Airtel Zambia Pension Trust Scheme

10 D.G.Partners 0.1% D.G.Partners

11 Other minority shareholders 0.6% Other minority shareholders

share capital remained at 114, 046 ,000 ordinary “A” shares of K0.001 each.

SIGNIFICANT EVENTS DURING THE YEAR

There were no significant events during the year.

RESULTS

During the financial year ended 30 June 2019 the Group recorded a loss before tax of K16.59million (2018: K50.32 million loss before tax).

Loans and advances grew from K635.66 million to K686.46 million, while customer deposits grew from K890.72 million to K942.59 million during the financial year ended 30 June 2019.

The Loss for the year has been deducted from the retained earnings.

DIVIDENDS

The Directors have not declared a dividend for the year ended 30 June 2019 (2018: Nil).

DIRECTORS

The Directors who held office during the year and to the date of this report were:

Mr. Johannes Jacobus SwanepoelNon-Executive Director,Resigned 31st August 2019

Mr Guy Zingalume PhiriIndependent, Non-Executive Director

Mr Marthinus Johannes PrinslooNon-Executive Director (Chairman)

Mr Petrus Johannes Van Der WaltManaging Director,appointed 19 March 2019

Mr Christiaan Petrus De VriesNon-Executive Director,Joined 4th October 2019


Directors’ emoluments and interests are disclosed in note 28 of the annual financial statements.

INTERESTS REGISTER INFORMATION

During the year, the Company officers (a director, company secretary or executive officer of a company) made declarations of interest in Company transactions and business as follows:

Mr Guy Zingalume Phiri

1 interest declared

The interests’ register, as required by the Companies Act of 2017, containing particulars of the above stated interests declared, is available for inspection at the Company’s registered office.

The total remuneration of employees for the year ended to 30 June 2019 was K76.85 million (2018: K63.87 million) and the average number of employees per month was as follows:

Month Number

July 2018 291

August 2018 296

September 2018 296

October 2018 295

November 2018 298

December 2018 309

Month Number

January 2019 309

February 2019 309

March 2019 309

April 2019 309

May 2019 309

June 2019 308

DIRECTORS’ EMOLUMENTS AND INTERESTS

NUMBER OF EMPLOYEES AND REMUNERATION

Signed on behalf of the Board of Directors

Secretary

HEALTH AND SAFETY

The Group has policies and procedures to safeguard the occupational health and safety of its employees.

RESEARCH AND DEVELOPMENT

The Group did not carry out any research and development in the year.

GIFTS AND DONATIONS

The Group realises the importance of the communities in which it serves and invests in corporate social responsibility activities.

PROPERTY AND EQUIPMENT

The Group purchased property and equipment amounting to K3.32 million during the year (2018: K10.14 million). In the opinion of the directors, the carrying value of property and equipment is not more than the recoverable value.

PROHIBITED BORROWINGS OR LENDING

There were no instances of prohibited borrowing or lending as defined under Sections 72 and 73 of the Zambia Banking and

Financial Services Act 1994 (as amended).

RISK MANAGEMENT AND CONTROL

The Group through its normal operations is exposed to a number of risks, the most significant of which are credit, market, operational and liquidity risks. The Group’s risk management objectives and policies are disclosed under note 4 of the annual financial statements.

COMPLIANCE FUNCTION

The Group has a compliance function whose responsibility is to monitor compliance within the regulatory environment and the various internal control processes and procedures.

KNOW YOUR CUSTOMER AND MONEY LAUNDERING POLICIES

The Group has well established ‘Know Your Customer’ (KYC) and anti-money laundering policies and adheres to current legislation in these areas.

EXPORTS

During the year the Bank did not export any

services.

AUDITOR

The Auditor, PricewaterhouseCoopers Zambia, has indicated their willingness to continue in office and a resolution for their reappointment will be proposed at the next annual general meeting.

The Auditor remuneration for the year was K 1.56 million, comprised of K 1.32 million as regards audit services and K 0.24 million for other services rendered to the Company.

201924th September

21

CAVMONT CAPITAL HOLDINGS ZAMBIA PLC ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2018

The Zambia Companies Act of 2017 requires the Directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Group and of the Company as at the end of the financial year and of its financial performance. It also requires the Directors to ensure that the Company keeps proper accounting records that disclose, with reasonable accuracy, the financial position of the Company. They are also responsible for safeguarding the assets of the Company. The Directors are further required to ensure the Company adhere to the corporate governance principles or practices contained in Part VII’s Sections 82 to 122 of the Zambia Companies Act of 2017.

The Directors accept responsibility for the annual financial statements, which have been prepared using appropriate accounting policies supported by reasonable estimates, in conformity with International Financial Reporting Standards and the requirements of the Zambia Companies Act.

The Directors further accept responsibility for the maintenance of accounting records that may be relied upon in the preparation of financial statements, and for such internal controls as the directors determine necessary

to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error.

The Directors are of the opinion that the financial statements set out on pages 11 to 81 give a true and fair view of the state of the financial affairs of the Group and of its financial performance in accordance with International Financial Reporting Standards and the Zambia Companies Act of 2017. The Directors further report that they have implemented and further adhered to the corporate governance principles or practices contained in Part VII’s Sections 82 to 122 of the Zambia Companies Act of 2017.

As set out in note 2 (a) of the accompanying annual financial statements, the Group made a loss after tax of K15.82 million (2018: K41.66 million loss after tax) and has accumulated losses of K160.87 million (2018: K85.32 million) after taking into account the IFRS 9 transition adjustment K58.21 as a charge. The Group has implemented a comprehensive business strategy focused on mobilisation of deposits, responsible growth in assets, and an attractive value proposition for customers, realising cost efficiencies and effective risk management. The directors are confident that

this business strategy will continue to improve the profitability of the Group. On the basis of these actions, the directors are of the opinion that the Group will remain a going concern for at least 12 months from the date of these annual financial statements.

Signed on behalf of the Board of Directors

Director Director

2019

Statement of Directors’ Responsibilities

24th September


Independent auditor’s reportTo the Shareholders of Cavmont Capital Holdings Zambia Plc

22 ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2019


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Our opinion

Independent auditor’s Report

What we have audited

The annual financial statements of Cavmont Capital Holdings Zambia Plc are set out on pages 26 to 62 and comprise:

• the Group’s statement of financial position as at 30 June 2019;

• the Company’s statement of financial position as at 30 June 2019

• the Group’s statement of profit or loss and other comprehensive income for the year then ended;

• the Group’s statement of changes in equity for the year then ended;

• the Company’s statement of changes in equity for the year ended

• the Group’s statement of cash flows for the year then ended; and

• the notes to the financial statements, which include a summary of significant accounting policies.

Basis for opinion

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 annual financial statements” section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our othe ethical responsibilities in accordance with the IESBA Code.

Emphasis of matter

We draw attention to Note 4 (e) in the annual

financial statements, which indicates that Cavmont Bank Limited had capital of K141million as at 30 June 2019 which was below the minimum regulatory capital of K520million for foreign owned banks. The Bank has requested for a further extension to 31 December 2021 to fully comply with the requirements of a local owned Bank of K104million but as at the date of this report, no formal approval has been received. Our opinion is not modified in respect of this matter.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the annual financial statements of the current period. These matters were addressed in the context of our audit of the annual financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

In our opinion, the consolidated annual financial statements give a true and fair view of the consolidated financial position of Cavmont Capital Holdings Plc (the ‘’Company’’) and its subsidiary Cavmont Bank Limited (together “the Group”) as at 30 June 2019, and of the Groups financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and the requirements of the Companies Act, 2017 of Zambia and the requirements of Lusaka Stock Exchange Rules.

The notes on pages 31 to 62 are an integral part of this annual report.

To the Shareholders of Cavmont Capital Holdings Zambia Plc

Report on the audit of the consolidated annual financial statements


Key audit matter How our audit addressed the key audit matter

Calculation of expected credit losses on financial assets at amortised cost

The Group adopted IFRS 9: ‘Financial Instruments’ for the first time on 1 July 2018 which significantly impacted its calculation of impairment losses on financial assets at amortised cost.

As at 30 June 2019 the carrying value of gross loans and advances was K 760 million (2018: K653 million) and the allowance for impairment of financial assets amounted to K73 million (2018: K 17.8 million).

The Group assesses at each reporting date whether the financial assets carried at amortised cost are credit impaired. The Group’s management has applied an expected credit loss (“ECL”) model to determine the allowance for impairment of financial assets.

The ECL model involves the use of various assumptions, macro-economic factors and study of historical trends relating to the Group’s history of collection of financial assets, which include the Probability of Default (PD), Loss Given Default (LGD) and Exposure at Default (EAD)

We considered this as key audit matter due to the judgements and estimates involved in the application of the expected credit loss model

Recoverability of deferred tax assets

The Group has a deferred tax asset of K49.6 million. According to Zambian legislation, tax losses can only be carried forward for a maximum of 5 years before they must be written off.

The recoverability of the deferred tax asset is dependent on the ability of the bank to generate future profits to utilize these losses.

We considered this as key audit matter due to the judgements and estimates involved in the future period financial projections.

We carried out the following procedures:

• We reviewed the Group’s methodology for determining expected credit losses and evaluated this against the requirements of IFRS 9.

• We independently recalculated the expected credit losses and compared this with the Group’s estimate.

• We reviewed the assumptions used in the model and assessed them for reasonability

• For a sample of loans, we reviewed credit files in order to validate the underlying accuracy of the data being used in the Group’s calculations

No exceptions were noted with respect to this matter

We carried out the following procedures:

• We have reviewed management’s projections regarding the profitability of the Bank for consistency in the application of assumptions over each of the years considered in the projections.

• We have assessed the data and assumptions used by management in their projections for reasonability and where possible, have agreed projections to other supporting information

No exceptions were noted with respect to this matter

Other information

The Directors are responsible for the other information. The other information comprises the Group’s Annual Report but does not include the annual financial statements and our auditor’s report thereon.

Our opinion on the consolidated annual financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audit of the consolidated annual financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the annual financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information, we conclude that there

is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the Directors for the consolidated annual financial statements

The Directors are responsible for the preparation of consolidated annual financial statements that give a true and fair view in accordance with IFRS as issued by the IASB and the requirements of the Companies Act, 2017 of Zambia and for such internal control as the Directors determine is necessary to enable the preparation of consolidated annual financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the annual 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.

The Directors are responsible for overseeing the Group’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated annual financial statements

Our objectives are to obtain reasonable assurance about whether the annual 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 annual financial statements.

Independent Auditors Report

25

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 annual 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 annual 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 annual financial statements, including the disclosures, and whether the annual 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 to express an opinion on the consolidated annual 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 annual 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

The Companies Act, 2017 of Zambia

The Companies Act, 2017 of Zambia requires that in carrying out our audit of Cavmont

Capital Holdings Plc, we report on whether:

1. as required by section 259 (3)(a), there is a relationship, interest or debt which, ourselves, as the Company Auditor, have in the Company;

2. as required by section 259 (3)(b), there are serious breaches by the Company’s Directors, of corporate governance principles or practices contained in Part VII’s Sections 82 to 122 of the Companies Act, 2017 of Zambia; and

3. in accordance with section 250 (2), as regards loans made to a Company Officer (a director, company secretary or executive officer of a company), if the Company does not state the:

• particulars of any relevant loan made during the financial year to which the accounts apply, including any loan which was repaid during that year; or

• ●amount of any relevant loan, whenever made, which remained outstanding at the end of the financial year.

In respect of the foregoing requirements, we have no matter to report

PricewaterhouseCoopers

Chartered Accountants

Lusaka

2019

Nasir Ali

Practicing Certificate Number: AUD/F005226

Partner signing on behalf of the firm

24th September


The notes on pages 31 to 62 are an integral part of this annual report.

Consolidated statement of profit or loss and other comprehensive income

Notes 30 June 2019 30 June 2018

Interest income 5 159,200 136,371

Interest expense 6 (76,365) (74,057)

Net interest income 82,835 62,314

Recoveries / (Impairment) on loans and advances 13 7,528 (18,829)

Net interest income after loan impairments 90,363 43,485

Fee and commission income 7 30,335 38,253

Fee and commission expense 7 (10,836) (7,176)

Net fee and commission income 19,499 31,077

Net gains on foreign currency trading 35,577 12,747

Other income 1,325 1,022

Total operating income 146,764 88,331

Personnel expenses 9 (76,849) (63,868)

Other operating expenses 8 (86,503) (74,783)

Total operating expenses (163,352) (138,651)

Loss before income tax (16,588) (50,320)

Income tax credit 10 765 8,665

Loss for the year (15,823) (41,655)

Other comprehensive income: Items that will not be classified to profit or loss

Total comprehensive loss for the year (15,823) (41,655)

Earnings per share attributable to the equity holders of the Group

- Basic and diluted (loss per share) kwacha per share (0.139) (0.365)

(Amounts in K’000 unless otherwise indicated)

Annual Report & Financial statement

27


Notes 30 June 2019 30 June 2018

ASSETS

Cash and balances with Bank of Zambia 11 134,684 77,551

Placements with other banks 12 50,002 96,278

Equity investments 106 106

Financial assets held at amortised cost 14 (a) 196,540 181,657

Loans and advances to customers 13 686,466 635,666

Current tax asset 10 18,648 14,910

Deferred tax asset 17 49,626 17,514

Other assets 18 71,417 91,234

Property and equipment 15 32,145 36,137

Intangible assets 16 13,105 14,738

Total assets 1,252,739 1,165,791

EQUITY AND LIABILITIES

LIABILITIES

Customer deposits 19 942,591 890,718

Redeemable preference share capital 23 126,006 50,006

Other liabilities 20 183,860 149,241

Total liabilities 1,252,457 1,089,965

EQUITY

Share capital 21 114,046 114,046

Share premium 21 35,508 35,508

Revaluation reserve 15 8,268 8,268

Non distributable reserve 24 3,327 3,327

Accumulated losses (160,867) (85,323)

Total equity 282 75,826

Total equity and liabilities 1,252,739 1,165,791

Consolidated statement of financial position

The financial statements on pages 26 to 62 were approved for issue by the Board of Directors on

The notes on pages 31 to 62 are an integral part of this Annual Report.

2019 and signed on its behalf by:

Director Director

24th September


24th September

The financial statements on pages 26 to 62 were approved for issue by the Board of Directors on


2019 and signed on its behalf by:

Director Director

Company statement of financial position

ASSETS Notes 30 June 2019 30 June 2018

NON-CURRENT ASSETS

Investment in subsidiary 14(b) 149,750 149,750

CURRENT ASSETS

Cash and cash equivalents 11 106 102

Other assets 18 - 109

106 211

LIABILITIES

Current liabilities

Other liabilities 20 - 364

- 364

Net assets 149,856 149,597

EQUITY

Share capital 22 114,046 114,046

Share premium 23 35,508 35,508

Accumulated Profit 302 43

Total equity 149,856 149,597

The notes on pages 31 to 62 are an integral part of these financial statements.


29

Consolidated statement of changes in equity

Share capital

Share premium

Non distributable

reserve

Accumulated losses

Revaluation reserve

Total equity

Year ended 30 June 2018

At start of the year 114,046 35,508 3,327 (43,668) 8,268 117,481

Comprehensive income

Other loss for the year - - - (41,655) - (41,655)

At end of the year 114,046 35,508 3,327 (85,323) 8,268 75,826


At start of the year as originally stated 114,046 35,508 3,327 (85,323) 8,268 75,826

Decrease arising from adoption of IFRS 15 - - - (1,510) - (1,510)

Decrease arising from adoption of IFRS 9 - - - (89,555) - (89,555)

Deferred tax arising from adoption of IFRS 9 - - - 31,344 - 31,344

Balance at 1 July 2018 as restated 114,046 35,508 3,327 (145,044) 8,268 16,105

Other comprehensive income

Loss for the year - - - (15,823) - (15,823)

At end of year 114,046 35,508 3,327 (160,867) 8,268 282


Share Capital Share premium Accumulated Profit

Total Equity


At start of the year 114,046 35,508 43 149,597


Profit for the year - - - -

Comprehensive income for the year - - - -

At end of the year 114,046 35,508 43 149,597


At start of the year 114,046 35,508 43 149,597


Profit for the year - - 259 259

Comprehensive income for the year - - - -

At end of the year 114,046 35,508 302 149,856

Company statement of changes in equity



Consolidated statement of cash flows

Notes 30 June 2019


Cash flows from operating activities

Interest receipts 159,200 136,371

Interest payments (76,365) (74,057)

Net fee and commission receipts 19,499 31,077

Other income received 1,066 1,022

Payments to employees and suppliers (130,073) (144,668)

Income tax paid 10 (3,741) (3,762)

Cash flows from operating activities before changes in operating assets and liabilities

(30,414) (54,017)

Changes in operating assets and liabilities

Other assets 20,013 1,327

Other liabilities 34,619 15,563

Cash reserve requirement (3,599) 63,064

Loans and advances (106,662) (56,826)

Customer deposits 51,936 29,978

Net cash outflow from operating activities (34,107) (911)

Cash flows from investing activities

Investments in government securities (93,000) (167,201)

Redemption of government securities 61,500 165,490

Purchase of property and equipment 15 (3,316) (10,143)

Disposal of property and equipment 181 -

Purchase of intangible assets 16 - (3,555)

Net cash used in investing activities (34,635) (15,409)

Cash flows from Financing activities

Issuance of preference capital 76,000 -

Net cash generated from financing activities 76,000 -

(Decrease)/ Increase in cash and cashEquivalents

7,258 (16,320)

Cash and Cash equivalent at the start of year 129,288 132,860

Effects of foreign currency transactions - 12,748

Increase / (decrease) in cash and cash equivalents 7,258 16,320)

Cash and cash equivalents at end of year 27 136,546 129,288




31

IAS 39 IFRS 9

Financial Assets Measurement category Carrying amount

Measurement category

Carrying amount

Cash and balances with central banks

Amortised cost (Loans and receivables)

77,571 Amortised cost 77,571

Loans and advances to banks



Loans and advances to customers



Investment in equity FVOCI (Available for sale) 106 FVPL (Mandatory) 106

Investment securities Amortised cost (Loans and receivables)


Total (3,741) 991,278 901,723

Notes1. General information

These financial statements disclose the state of affairs of Cavmont Capital Holdings Zambia Plc (“the Company”) and its subsidiary Cavmont Bank Limited (“the Bank”) (together “the Group”). Cavmont Capital Holdings Zambia Plc (“the Company”) is incorporated in Zambia under the Zambia Companies Act of 2017 as a public limited liability company, and is domiciled in Zambia. The address of its registered office is:

Cavmont House, Stand No 2374Thabo Mbeki Road,P O Box 38474 Lusaka, Zambia

The Company’s shares are listed on the Lusaka Stock Exchange.

2. Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these annual financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

The Group’s annual financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations issued by the International Accounting Standards Board (IASB) and International Financial Reporting Interpretation Committee (IFRIC) effective at the time of preparing these statements. The annual financial statements have been prepared under the historical cost convention, as modified by the revaluation of property financial assets, financial assets held at fair value through profit or loss and all derivative contracts.

(a) Basis of preparation

The annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) and IFRS Interpretations Committee (IFRS IC) interpretations applicable to companies reporting under IFRS. The measurement basis applied is the historical cost basis, except where otherwise stated in the accounting policies below. The annual financial statements are presented in Zambian Kwacha (K), rounded to the nearest thousand.

The preparation of annual financial statements in conformity with IFRS requires the use of estimates and assumptions. It also requires the directors to exercise judgement in the process of applying the Bank’s accounting policies. The areas involving a higher degree of judgement or complexity, or where assumptions and estimates are significant to the financial statements are disclosed in note 3.

Going concern

The Company does not trade but relies on the results of the wholly owned subsidiary. The annual financial statements of the Company together with the subsidiary (together ‘the Group’) have been prepared on the going concern basis, which assumes that the Group will continue to be able to meet its liabilities as and when they fall due for the foreseeable future. During the year, the Group made a loss after tax of K15.82 million (2018: K41.66 million loss after tax) and has accumulated losses of K160.87 million (2018: K85.32 million) after taking the IFRS 9 adjustment.

The Group is highly committed to further differentiate itself in the financial sector, with focus on customer value proposition and product delivery. The Bank will continue to pursue various growth prospects and strive to attract new customers, diversify its funding base and aim for improved operational efficiencies. The Group confirms that it will continue to use its endeavours to pursue localisation and will continue to ensure that it meets the capital requirement for a local bank.

The Directors believe it is appropriate to continue to adopt the going concern basis in preparing the financial statements. The financial statements do not include the adjustments that would result if the Group was unable to continue as a going concern.

(b) Changes in accounting policy and disclosures

(i) New and amended standards adopted by the Group

In the current year, the Group has applied a number of amendments to IFRSs issued by the International Accounting Standards Board (IASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2018. The Bank has not adopted early any standard, interpretation or amendment that has been issued but is not yet effective:

IFRS 9 Financial Instruments

The Group has adopted IFRS 9 as issued by the IASB in July 2014 with a date of transition of 1 July 2018, which resulted in changes in accounting policies and adjustments to the amounts previously recognised in the financial statements. The Group did not early adopt any of IFRS 9 in previous periods.

As permitted by the transitional provisions of IFRS 9, the Group 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 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 our accounting policies for recognition, classification and measurement of financial assets and financial liabilities and impairment of financial assets. IFRS 9 also significantly amends other standards dealing with 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 Group . Further details of the specific IFRS 9 accounting policies applied in the current

period (as well as the previous IAS 39 accounting policies applied in the comparative period) are described in more detail the section below.

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 July 2018 are compared as follows.


There were no changes to the classification and measurement of financial liabilities, other than to changes in the fair value of financial liabilities designated at fair value through profit or loss that are attributable to changes in the instrument’s credit risk, which are now presented in other comprehensive income.

Reconciliation of statement of financial position balances from IAS 39 to IFRS 9

The Group performed a detailed analysis of its business models for managing financial assets and analysis of their cash flow characteristics. The following table reconciles the carrying amounts of financial assets, from their previous measurement category in accordance with IAS 39 to their new measurement categories upon transition to IFRS 9 on 1 July 2018:


IAS 39 carrying amount

Re- classifications Re- measurements IFRS 9 carrying amount

Cash and balances with central banks

Opening balance under IAS 39 and Closing balance under IFRS 9

77,571 - - 77,571

Placements with other banks

Opening balance under IAS 39 96,278 - - 96,278

Remeasurement: ECL Allowance - - (15) (15)

Closing balance under IFRS 9 96,278 - (15) 96,263

Investment securities

Opening balance under IAS 39 181,657 - - 181,657

Remeasurement: ECL Allowance (4,474) - (4,474) (4,474)

Closing balance under IFRS 9 177,183 - (4,474) 177,183

Loans and advances to Customers

Opening balance under IAS 39 635,666 635,666

Subtraction: To FVPL (IFRS 9) - - -

Remeasurement: ECL Allowance (85,066) - (85,066) (85,066)

Closing balance under IFRS 9 550,600 550,600

Total Financial assets 991,172 (89,555) 901,617

Measurement category Loan loss allowance under IAS 39 / Provision under IAS 37

Re- classifications Re- measurements Loan loss allowance - IFRS 9

Loans and receivables (IAS 39) / Financial assets at amortised cost (IFRS 9)

Cash and balances with central banks - - - -

Placements with other banks - - 15 15

Loans and advances to Customers 17,807 - 85,066 102,873

Financial assets at amortised cost - - - -

Total 17,807 - 85,081 102,888

Held to maturity (IAS 39) / Financial assets at amortised cost (IFRS 9)

Investment securities - - 4,474 4,474

Available for sale financial instruments (IAS 39) / Financial assets at FVOCI (IFRS 9)(4,474)

Investment securities - - - -

Loan commitments and financial guarantee contracts

Loans and advances to Customers (Loan commitments)

- - - -

Provisions (Loan commitments) - - - -

Provisions (Financial guarantees) - - - -

Total - - - -

The total remeasurement loss of K89.55 million was recognised in opening reserves at 1 July 2018. There was no reclassification from retained earnings to other reserves at 1 July 2018 in respect of cumulative own credit adjustments on financial liabilities designated at fair value through profit and loss.

The following explains how applying the new classification requirements of IFRS 9 led to changes in classification of certain financial assets held by the Group as shown in the table above:

Reconciliation of impairment allowance balance from IAS 39 to IFRS 9

The following table reconciles the prior period’s closing impairment allowance measured in accordance with the IAS 39 incurred loss model to the new impairment allowance measured in accordance with the IFRS 9 expected loss model at 1 July 2018:

(b) Changes in accounting policy and disclosures (continued)

(i) New and amended standards adopted by the Group continued

Notes: summary of significant changes (continued)


33

IFRS 15 Revenue from Contracts with Customers

The standard outlines the principles a Company must apply to measure and recognise revenue. The core principle is that a Company will recognise revenue at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer.

The principles in IFRS 15 must be applied using a five-step model:

1. Identify the contract(s) with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations in the contract

5. Recognise revenue when (or as) the entity satisfies a performance obligation

The standard requires entities to exercise judgement, taking into consideration all of the relevant facts and circumstances when applying each step of the model to contracts with their customers.

IFRS 15 is more prescriptive than the previous IFRS requirements for revenue recognition and provides more application guidance. The adoption and application of IFRS 15 has had no material impact on the Group’s operations.

The following standards effective 1 January 2019 have had no material impact on the Bank.

• Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS 2

• Transfers of Investment Property - Amendments to IAS 40

• IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

• IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment - by - investment choice

(ii) New standards and interpretations not yet adopted by the Group

A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2019 and earlier application is permitted; however, the Group has not early adopted them in preparing these financial statements:

Of those standards that are not yet effective, IFRS 16 is expected to have a significant impact on the Group financial statements in the period of initial application:

Standard, Amendment or Interpretation Effective 1 January 2019

IFRS 16 Leases

This standard replaces the current guidance in IAS 17 and is a far reaching change in accounting by lessees in particular. Under IAS 17, lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 now requires lessees to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts. The IASB has included an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees.

The scope of IFRS 16 includes leases of all assets, with certain exceptions. A lease is defined as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

IFRS 16 requires lessees to account for all leases under a single on-balance sheet model in a similar way to finance leases under IAS 17. The standard includes two recognition

exemptions for lessees – leases of ’low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset).

Lessees will be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

At the very least, the new accounting model for lessees is expected to impact negotiations between lessors and lessees. Under IFRS 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

IFRS 16 supersedes IAS 17, ‘Leases’, IFRIC 4, ‘Determining whether an Arrangement contains a Lease’, SIC 15, ‘Operating Leases – Incentives’ and SIC 27, ‘Evaluating the Substance of Transactions Involving the Legal Form of a Lease’.

The impact on the Group for the initial year would be recognition of an asset and liability of K14 million.

The following amended standards are not expected to have a significant impact on the Group’s financial statements:

• Annual Improvements to IFRS Standards 2015–2017 Cycle – various standards

• Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28)

• Plan Amendment, Curtailment or Settlement (Amendments to IAS 19)

• IFRIC 23 Uncertainty over Income Tax Treatments

• IAS 23 Borrowing Costs - Borrowing costs eligible for capitalisation

• Amendments to References to Conceptual Framework in IFRS Standards

• IFRS 17 Insurance Contracts.

(c) Functional currency and translation of foreign currencies

(i) Functional and presentation currency

Items included in the annual financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The financial statements are presented in Kwacha (“K”) which is the Group’s functional currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.

(d) Interest income and expense

Interest income and expense for all interest bearing financial instruments are recognised within ‘interest income’ or ‘interest expense’ respectively in profit or loss using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period.

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the

expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised using the rate of interest that was used to discount the future cash flows for the purpose of measuring the impairment loss.

(e) Fees and commission income

Fees and commissions are generally recognised on an accrual basis when the service has been provided. The Group recognises two major kinds of fees and commission income;

Fees and commission from Loans and advances

Commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group has retained no part of the loan package for itself or has retained a part at the same effective interest rate as the other package for itself or has retained a part at the same effective interest rate as the other participants.

Fees and Commission on Transactions

The Group also charges fees and commission on the maintenance of currents accounts, account service, and transactions charges. These are not included in the effective interest rate on calculation as they are not linked to loans and advances of the Group. These are only recognised as revenue as and when the transaction occurs or the current account has been maintained with the Group Performance-linked fees or fee components are recognised when the performance criteria are fulfilled.

(f) Financial assets and liabilities

The Group classifies its financial assets into loans or receivables or held-to-maturity financial assets. The directors determine the appropriate classification of financial assets at initial recognition.

(i) Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.

(ii) Financial assets at amortised cost

Measurement methods

Amortised cost and effective interest rate

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, adjusted 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 Group calculates the credit-adjusted effective interest rate,

(b) Changes in accounting policy and disclosures (continued)

(i) New and amended standards adopted by the Group continued


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 Group 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) POCI financial assets, for which the original credit-adjusted effective interest rate is applied to the amortised cost of the financial asset,

b) 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 Group 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 issue of the financial asset or financial liability, 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) 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.

b) 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 July 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 perspective, such as loans, government and corporate bonds and trade receivables purchased from clients in factoring arrangements without recourse.

Classification and subsequent measurement of debt instruments depend on:

i. The Group’s business model for managing the asset; and

ii. The cash flow characteristics of the asset.

Based on these factors, the Group 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 these assets is adjusted by any expected credit loss allowance recognised and measured as described in note 4. 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 principal 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 Group manages the assets in order to generate cash flows. That is, whether the Group’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 Group 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. For example, the Group’s business model for the mortgage loan book is to hold to collect contractual cash flows, with sales of loans only being made internally to a consolidated SPV for the purposes of collateralising notes issued, with no resulting derecognition by the Group. Another example is the liquidity portfolio of assets, which is held by the Group as part of liquidity

management and is generally classified within the hold to collect and sell business model. 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.

SPPI: Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Group assesses whether the financial instruments’ cash flows represent solely payments of principal and interest (the `SPPI test’). In making this assessment, the Group 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.

Financial assets with embedded derivatives are considered in their entirety when determining whether their cash flows are solely payment of principal and interest.

The Group 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 Group subsequently measures all equity investments at fair value through profit or loss, except where management has elected, at initial recognition, to irrevocably designate an equity investment at fair value through other comprehensive income. The Group’s 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 Group 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 possible outcomes;

• The time value of money; and

• Reasonable and supportable information that is available without undue cost or effort at the reporting date about


(f) Financial assets and liabilities (continued)

(ii) Financial assets at amortised cost continued

Notes: summary of significant accounting policies (continued)


35

past events, current conditions and forecasts of future economic conditions.

Note 4 provides more detail of how the expected credit loss allowance is measured.

(iii) Modification of loans

The Group 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 Group 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 Group derecognises the original financial asset and recognises a ‘new’ asset at fair value and recalculates a 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 Group 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 Group 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 (i) the Group transfers substantially all the risks and rewards of ownership, or (ii) the Group neither transfers nor retains substantially all the risks and rewards of ownership and the Group has not retained control.

The Group enters into transactions where it retains the contractual rights to receive cash flows from assets but assumes a contractual obligation to pay those cash flows to other entities and transfers substantially all of the risks and rewards. These transactions are accounted for as ‘pass through’ transfers that result in derecognition if the Group:

(i) Has no obligation to make payments unless it collects equivalent amounts from the assets;

(ii) Is prohibited from selling or pledging the assets; and

(iii) Has an obligation to remit any cash it collects from the assets without material delay.

Collateral (shares and bonds) furnished by the Group under standard repurchase agreements and securities lending and borrowing transactions are not derecognised because the Group 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 Group retains a subordinated residual interest

Financial liabilities

(i) 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 derivatives, 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; and

• Financial guarantee contracts and loan commitments.

(ii) 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 Group 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

(g) 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 (calculated as described in note 4); and

• The premium received on initial recognition less income recognised in accordance with the principles of IFRS 15.

Loan commitments provided by the Group are measured as the amount of the loss allowance (calculated as described in note 4). The Group has not provided any commitment to provide loans at a 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 Group 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.

(h) Policy applicable before 1 July 2018

Objective evidence of impairment

At each reporting date, the Group assessed whether there was objective evidence that financial assets not carried at FVTPL were impaired. A financial asset or a group of financial assets was ‘impaired’ when objective evidence demonstrated that a loss event had occurred after the initial recognition of the asset(s) and that the loss event had an impact on the future cash flows of the asset(s) that could be estimated reliably.

In addition, a retail loan that was overdue for 90 days or more was considered impaired. Objective evidence that financial assets were impaired included:

• significant financial difficulty of a borrower or issuer;

• default or delinquency by a borrower;

• the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise;

• indications that a borrower or issuer would enter bankruptcy;

• the disappearance of an active market for a security; or

• observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlated with defaults in the group.

A loan that was renegotiated due to a deterioration in the borrower’s condition was usually considered to be impaired unless there was evidence that the risk of not receiving contractual cash flows had reduced significantly and there were no other indicators of impairment.

In addition, for an investment in an equity security, a significant or prolonged decline’ in its fair value below its cost was objective evidence of impairment. In general, the Bank considered a decline of 20% to be ‘significant’ and a period of nine months to be ‘prolonged’. However, in specific circumstances a smaller decline or a shorter period may have been appropriate.

The Group considered evidence of impairment for loans and advances and held-to-maturity investment securities


(f) Financial assets and liabilities (continued)

(ii) Financial assets at amortised cost continued


at both a specific asset and a collective level. All individually significant loans and advances and held-to-maturity investment securities were assessed for specific impairment. Those found not to be specifically impaired were then collectively assessed for any impairment that had been incurred but not yet identified (IBNR). Loans and advances and held-to maturity investment securities that were not individually significant were collectively assessed for impairment by grouping together loans and advances and held-to-maturity investment securities with similar credit risk characteristics.

In making an assessment of whether an investment in sovereign debt was impaired, the Bank considered the following factors:

• The market’s assessment of creditworthiness as reflected in the bond yields.

• The rating agencies’ assessments of creditworthiness.

• The country’s ability to access the capital markets for new debt issuance.

• The probability of debt being restructured, resulting in holders suffering losses through voluntary or mandatory debt forgiveness.

• The international support mechanisms in place to provide the necessary support as ‘lender of last resort’ to that country, as well as the intention, reflected in public statements, of governments and agencies to use those mechanisms. This included an assessment of the depth of those mechanisms and, irrespective of the political intent, whether there was the capacity to fulfil the required criteria.

Individual or collective assessment

An individual measurement of impairment was based on management’s best estimate of the present value of the cash flows that were expected to be received. In estimating these cash flows, management made judgements about a debtor’s financial situation and the net realisable value of any underlying collateral. Each impaired asset was assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable were independently approved by the Credit Risk function.

The collective allowance for groups of homogeneous loans was established using statistical methods such as roll rate methodology or, for small portfolios with insufficient information, a formula approach based on historical loss rate experience. The roll rate methodology used statistical analysis of historical data on delinquency to estimate the amount of loss. Management applied judgement to ensure that the estimate of loss arrived at on the basis of historical information was appropriately adjusted to reflect the economic conditions and product mix at the reporting date. Roll rates and loss rates were regularly benchmarked against actual loss experience.

The IBNR allowance covered credit losses inherent in portfolios of loans and advances, and held to-maturity investment securities with similar credit risk characteristics when there was objective evidence to suggest that they contained impaired items but the individual impaired items could not yet be identified.

In assessing the need for collective loss allowance, management considered factors such as credit quality, portfolio size, concentrations and economic factors. To estimate the required allowance, assumptions were made to define how inherent losses were modelled and to determine the required input parameters, based on historical experience and current economic conditions. The accuracy of the allowance depended on the model assumptions and parameters used in determining the collective allowance.

Loans that were subject to a collective IBNR provision were not considered impaired.

Measurement of impairment

Impairment losses on assets measured at amortised cost were calculated as the difference between the carrying amount and the present value of estimated future cash

flows discounted at the asset’s original effective interest rate. Impairment losses on available-for-sale assets were calculated as the difference between the carrying amount and the fair value.

Reversal of impairment

• For assets measured at amortised cost: If an event occurring after the impairment was recognised caused the amount of impairment loss to decrease, then the decrease in impairment loss was reversed through profit or loss.

• For available-for-sale debt security: lf, in a subsequent period, the fair value of an impaired debt security increased and the increase could be related objectively to an event occurring after the impairment loss was recognised, then the impairment loss was reversed through profit or loss; otherwise, any increase in fair value was recognised through OCI.

Any subsequent recovery in the fair value of an impaired available-for-sale equity security was always recognised in OCI.

Presentation

Impairment losses were recognised in profit or loss and reflected in an allowance account against loans and receivables or held-to-maturity investment securities. Interest on the impaired assets continued to be recognised through the unwinding of the discount.

Impairment losses on available-for-sale investment securities were recognised by reclassifying the losses accumulated in the fair value reserve in equity to profit or loss. The cumulative loss that was reclassified from equity to profit or loss was the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment attributable to the application of the effective interest method were reflected as a component of interest income.

Write-off

The Group wrote off a loan or an investment debt security, either partially or in full, and any related allowance for impairment losses, when Credit determined that there was no realistic prospect of recovery.

Designation at fair value through profit or loss

Financial assets

At initial recognition, the Group has designated certain financial assets as at FVTPL because this designation eliminates or significantly reduces an accounting mismatch, which would otherwise rise.

Before 1 July 2018, the Group also designated certain financial assets as at FVTPL because the assets were managed, evaluated and reported internally on a fair value basis.

Financial liabilities

The Group has designated certain financial liabilities as at FVTPL in either of the following circumstances:

• the liabilities are managed, evaluated and reported internally on a fair value basis; or

• the designation eliminates or significantly reduces an accounting mismatch that would otherwise arise.

(i) Property and equipment

All categories of property and equipment are initially recorded at cost. Buildings are shown at fair value, based on valuations by external independent valuers, less subsequent depreciation for buildings. Valuations are performed with sufficient regularity to ensure that the fair value of a revalued asset does not differ materially from its carrying amount, but at least on a triennial basis. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. All other property and equipment are stated at

historical cost less accumulated depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit or loss during the financial period in which they are incurred.

Increases in the carrying amount arising on revaluation are credited to a revaluation reserve in equity. Decreases that offset previous increases of the same asset are charged against the revaluation surplus; all other decreases are charged to profit or loss. Each year the difference between depreciation based on the re-valued carrying amount of the asset (the depreciation charged to profit or loss) and depreciation based on the asset’s original cost is transferred from the revaluation surplus to retained earnings.

Depreciation on other assets is calculated on the straight line basis to allocate their cost less their residual values over their estimated useful lives, as follows:

Buildings 50 years

Leasehold improvements 5 years

Motor vehicles-owned 4 years

Motor vehicles - leased Shorter of 4 years or over

lease term if less than 4 years

Fixtures, fittings and equipment 3 - 8 years

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at reporting date.

The Group assesses at each reporting date whether there is any indication that any item of property, plant and equipment is impaired. If any such indication exists, the Bank estimates the recoverable amount of the relevant assets. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). An asset’s carrying amount is written down immediately to its estimated recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposal of property and equipment are determined by comparing proceeds with the carrying amount and are included in profit or loss. On disposal of re-valued assets, amounts in the revaluation surplus relating to that asset are transferred to retained earnings.

(j) Intangible assets

Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over the estimated useful lives (11 years).

Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads.

Computer software development costs recognised as assets are amortised over their estimated useful lives.

Computer Software 11 Years

(k) Income tax

Income tax expense is the aggregate of the charge to profit or loss in respect of current income tax and deferred income tax. Tax is recognised in the profit and loss account unless it


(h) Policy applicable before 1 July 2018 (continued)

Notes: summary of Objective evidence of impairment (continued)


37

relates to items recognised directly in equity, in which case it is also recognised directly in equity.

Current income tax is the amount of income tax payable on the taxable profit for the year determined in accordance with the Zambian Income Tax Act.

Deferred income tax is recognised, using the liability method, for all temporary differences arising between the tax bases of assets and liabilities and their carrying values for financial reporting purposes. However, the deferred income tax is not accounted for if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.

(l) Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

(m) Employee benefits

Retirement benefit obligations

The Group operates a defined contribution scheme for its employees. The assets of the scheme are held in a separate fund. Cavmont Capital Bank Limited Pension Scheme, which is funded by contributions from both the bank and its employees. It is administered by AON Pension Fund Administrators Limited. The Bank and all its employees also contribute to the National Pension Scheme Fund, which is a defined benefit scheme.

A defined contribution scheme is a pension benefit plan under which the company pays fixed contributions into a separate entity (fund) and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The Bank’s contributions to the defined contribution schemes are charged to profit or loss in the year in which they fall due. The Group has no further obligation once the contributions have been paid.

(n) Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

(o) Share capital

Ordinary shares are classified as ‘share capital’ in equity. Any premium received over and above the par value of the shares is classified as ‘share premium’ in equity.

(p) Acceptances and letters of credit

Acceptances and letters of credit are accounted for as off-balance sheet transactions and disclosed as contingent liabilities. The amount recognized is based on the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The income is generally recognised on an accrual basis.

(q) Financial liabilities

The Group’s holding in financial liabilities represents mainly deposits from banks, group borrowings and customers and other liabilities. Such financial liabilities are initially recognised at fair value and subsequently measured amortised cost. Financial liabilities are derecognised when they have been redeemed or otherwise extinguished. Preference shares, which are mandatorily redeemable on a specific date, are classified as liabilities. The dividends on

these preference shares are recognised in the income

statement as interest expense.

3. Critical accounting estimates and judgements in applying accounting policies

The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities, and the accompanying disclosures, as well as the disclosure of contingent liabilities. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. In the process of applying the Group’s accounting policies, management has made the following judgements and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. Existing circumstances and assumptions about future developments may change due to circumstances beyond the Bank’s control and are reflected in the assumptions if and when they occur. Items with the most significant effect on the amounts recognised in the financial statements with substantial management judgement and/or estimates are collated below with respect to judgements/estimates involved.

(i) 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). Explanation of the inputs, assumptions and estimation techniques used in measuring ECL is further detailed in note 37, which also sets out key sensitivities of the ECL to changes in these elements.

A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as:

i) Determining criteria for significant increase in credit risk;

ii) Choosing appropriate models and assumptions for the measurement of ECL;

iii) Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL; and

iv) Establishing Banks of similar financial assets for the purposes of measuring ECL.

(ii) Fair value of financial instruments

The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions (i.e., an exit price) regardless of whether that price is directly observable or estimated using another valuation technique. When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of valuation models. The inputs to these models are taken from observable markets where possible,

but where this is not feasible, estimation is required in establishing fair values. Judgements and estimates include considerations of liquidity and model inputs related to items such as credit risk (both own and counterparty), funding value adjustments, correlation and volatility

(iii) Recoverability of deferred tax asset

Critical estimates are made by the directors in determining the recoverability of the deferred tax asset recognised. This involves estimating the amount of future taxable profits against which the deferred tax asset can be realised, should insufficient taxable profits be generated, the deferred tax asset of K49.63million (2018: K17.51 million) would be recognised as an expense in the profit and loss account.

4. Financial risk management

The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. Those activities involve the analysis, evaluation, acceptance and management of some degree of risk or combination of risks. Taking risk is core to the Bank’s business, and the financial risks are an inevitable consequence of being in business. The Group’s aim is therefore to achieve an appropriate balance between risk and return and minimise potential adverse effects on its financial performance.

Risk management is carried out by the Group’s Treasury department, Asset and Liability Committee (ALCO) and the Board Audit Committee (BAC) under policies approved by the Board of Directors of the bank. Treasury identifies, evaluates financial risks in close cooperation with the operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk and the use of financial instruments.

Financial instruments by category

(a) The Group classifies the financial instruments into classes that reflect the nature of information and take into account the characteristics of those financial instruments. The classification made can be seen in the table as follows:


At 30 June 2019 Financial assets at fair value through profit or loss

Financial assets at amortised cost

Total

Financial assets

Cash and balances with Bank of Zambia - 134,578 134,578

Placements with other banks - 50,002 50,002

Equity investments 106 106

Loans and advances to customers - 686,466 686,466

Financial assets at amortised cost - 196,540 196,540

Other assets - 68,095 68,095

106 1,135,681 1,135,787

At 30 June 2018

Financial assets

Cash and balances with Bank of Zambia - 77,551 77,551

Placements with other banks - 96,278 96,278

Loans and advances to customers - 635,666 635,666

Financial assets at amortised cost - 181,657 181,657

Equity investments 106 - 106

Other assets - 83,376 83,376

106 1,074,528 1,074,634

Financial liabilities at amortised cost 2019 2018


Redeemable preference shares 126,006 50,006

Loans from other banks 157,719 138,168

Other payables and accruals 26,141 11,120

1,252,563 1,090,114


* Group

(b) Credit risk

Credit risk management

Credit risk is the risk that a counterparty will be unable to repay amounts when they fall due. In general, the Group manages its credit risk exposure by placing limits on the acceptable risk exposure to individual borrowers or groups of borrowers and within geographic and industry segments. Credit risk is monitored on an ongoing basis through the credit approval policies and procedures, categorization procedures to identify non performing advances and credit concentration as well as industry reviews to monitor portfolio credit risks. Loan classes are determined in line with Bank of Zambia guidelines.

The estimation of credit exposure is complex and requires the use of models, as the value of a product varies with changes in market variables, expected cash flows and the passage of time. The assessment of credit risk of a portfolio of assets entails further

estimations as to the likelihood of defaults occurring, of the associated loss ratios and of default correlations between counterparties.

The credit approval procedures are based on various credit discretionary limits of which the highest involves the Board Lending Committee (BLC), which is a subcommittee of the Board. This committee is also responsible for managing concentration risk.

The tables below present an analysis of financial assets by rating designation at 30 June 2019 and at 30 June 2018 based on the Bank’s internal rating policy:

Financial assets at fair value through

profit or loss


Balances with Bank of Zambia

Placement with other banks Total

At 30 June 2019

Investment grade - 196,540 134,578 50,002 381,120

Internally rated 106 754,561 - - 754,561

106 951,101 134,578 50,002 1,135,787

At 30 June 2018

Investment grade - 181,657 77,551 96,278 355,486

Internally rated 106 720,972 - - 721,078

106 902,629 77,551 96,278 1,076,564


4. Financial risk management (continued)

Notes (continued)


The Group takes on exposure to credit risk, which is the risk that a counterparty will cause a financial loss to the Bank by failing to pay amounts in full when due. Credit risk is the most important risk for the Bank’s business: management therefore carefully manages the exposure to credit risk.

Credit exposures arise principally in lending and investment activities. There is also credit risk in off-balance sheet financial instruments such as loan commitments. Credit risk management and control is centralised in the credit risk management team in the credit department which reports regularly to the Board of Directors.

The Group’s internal ratings for loans and advances are determined in line with Central Bank of Zambia guidelines.

Bank’s rating Description of grade

Pass Investment grade

Watch Standard monitoring

Substandard Special monitoring

Doubtful Special monitoring

Loss Default / classified

Legal provision Default / classified


Product Days Past due PD range as percentage Description of the grade

Commercial loan (Local currency)

0-30 days 9.17% Pass

31-89 days 61.14% Substandard

90+ days 100% Loss

Commercial loan (Foreign currency)



90+ days 100% Loss

Personal loan (Local currency) 0-30 days 7.35% Pass


90+ days 100% Loss

Personal loan (Foreign Currency currency)



90+ days 100% Loss

Overdrafts (Local currency) 0-30 days 3.7% Pass


90+ days 100% Loss

Overdrafts (Foreign currency currency)

0-30 days 3.7% Pass


90+ days 100% Loss

The Group uses internal credit risk gradings that reflect its assessment of the probability of default of individual counterparties. The Bank use internal rating models tailored to the various categories of counterparty. Borrower and loan specific information collected at the time of application (such as disposable income, and level of collateral for retail exposures; and turnover and industry type for wholesale exposures) is fed into this rating model. This is supplemented with external data such as credit bureau scoring information on individual borrowers. In addition, the models enable expert judgement from the Credit Risk Officer to be fed into the final internal credit rating for each exposure. This allows for considerations which may not be captured as part of the other data inputs into the model.

The following are additional considerations for each type of portfolio held by the Group:

Personal

After the date of initial recognition, for retail business, the payment behaviour of the borrower groupings is monitored on a periodic basis to develop a behavioural score. Any other known information about the borrower which impacts their creditworthiness — Such as unemployment and previous delinquency history — is also incorporated at the time of credit assessment for the individual borrower

Commercial

For wholesale business, the rating is determined at the borrower level. Updated information is gathered and included in credit assessments on an ongoing basis. In addition, the relationship manager will also update information about the creditworthiness of the borrower every year from sources such as public financial statements.

Treasury

For debt securities in the Treasury portfolio, external rating agency credit grades are used. These published grades are continuously monitored and updated. The PD’s associated with each grade are determined based on realised default rates over the prior 12 months, as published by the rating agency.

The Group’s rating method comprises 2 rating level (stage 1 - 0-30 days and stage 2 - 31-89 days) for instruments not in default and 1 default classes (90+ days). The master scale assigns each rating category a specified range of probabilities of default, which is stable over time. The rating methods are subject to an annual validation and recalibration so that they reflect the latest projections in the light of all actually observed defaults.

The Group’s internal rating scale and mapping of external ratings are set out below:

39

(b) Credit risk (continued)

Credit risk management continued

Stage 1 Stage 2 Stage 3

(initial recognition) (Significant increase in credit risk since initial recognition)

(Credit-impaired assets)

12 month expected credit losses Lifetime expected credit losses Lifetime expected credit losses

Expected credit loss measurement

IFRS 9 outlines a ‘three-stage’ model for impairment based on changes in credit quality since initial recognition as summarised below:

• A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Bank.

• If a significant increase in credit risk (‘SICR’) since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit-impaired.

• If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’. Please refer to note 4 for a description of how the Bank defines credit-impaired and default.

• Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis. Please refer to note 4 for a description of inputs, assumptions and estimation techniques used in measuring the ECL.

• A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward-looking information. Note 4 includes an explanation of how the Bank has incorporated this in its ECL models.

• Purchased or originated credit-impaired financial assets are those financial assets that are credit-impaired on initial recognition. Their ECL is always measured on a lifetime basis (Stage 3).

Further explanation is also provided of how the Group determines appropriate groupings when ECL is measured on a collective basis.

The following diagram summarises the impairment requirements under IFRS 9 (other than purchased or originated credit-impaired financial assets):

Change in credit quality since initial recognition

Significant increase in credit risk

The Group considers a financial instrument to have experienced a significant increase in credit risk when one or more of the following quantitative, qualitative or backstop criteria have been met:

Quantitative criteria

The credit rating at the reporting date has deteriorated significantly (moved down two rating levels, compared to the credit rating at initial recognition of the account. The thresholds for the significant increase in credit risk is determined by mapping the SICR roll rates to the actual historical arrears roll rates.

Qualitative criteria

Accounts are classified on a watch list when there is qualitative information available on the client’s credit risk increasing. These accounts are moved over to stage 2.

The criteria used to identify SICR are monitored and reviewed periodically for the appropriateness by the independent Credit Risk team.

Backstop

A backstop is applied and the financial instruments considered to have experienced a significant increase in credit risk if the borrower is more than 30 days past due on its contractual payments.

Definition of default

The Group considers a financial asset to be in default which is fully aligned with the credit-impaired, when it meets one or more of the following criteria:

Quantitative criteria

The borrower is more than 90 days past due on its contractual payments.

Qualitative criteria

The borrower meets unlikeliness to pay criteria, which indicates the borrower is in significant financial difficulty. These are instances where:

• The borrower is in long-term forbearance

• The borrower is deceased

• The borrower is insolvent

• The borrower is in breach of financial covenant(s)

• An active market for that financial asset has disappeared because of financial difficulties

• Concessions have been made by the lender relating to the borrower’s financial difficulty

• It is becoming probable that the borrower will enter bankruptcy

• Financial assets are purchased or originated at a deep discount that reflects the incurred credit losses.

The criteria above have been applied to all financial instruments held by the Group and are consistent with the definition of default used for internal credit risk management purposes. The default definition has been applied consistently to model the Probability of Default (PD), Exposure at Default (EAD) and Loss given Default (LGD) throughout the Bank’s expected loss calculations.

An instrument is considered to no longer be in default (i.e. to have cured) when it no longer meets any of the default criteria for a consecutive period of six months. This period of six months has been determined based on an analysis which considers the likelihood of a financial instrument returning to default status after cure using different possible cure definitions.

Measuring ECL – Explanation of inputs, assumptions and estimation techniques

The Expected Credit Loss (ECL) is measured on either a

12-month (12M) or Lifetime basis depending on whether a significant increase in credit risk has occurred since initial recognition or whether an asset is considered to be credit-impaired. Expected credit losses are the discounted product of the Probability of Default (PD), Exposure at Default (EAD), and Loss Given Default (LGD), defined as follows:

• The PD represents the likelihood of a borrower defaulting on its financial obligation (as per “Definition of default and credit-impaired” above), either over the next 12 months (12M PD), or over the remaining lifetime (Lifetime PD) of the obligation.

• EAD is based on the amounts the Group expects to be owed at the time of default, over the next 12 months (12M EAD) or over the remaining lifetime (Lifetime EAD). For example, for a revolving commitment, the Bank includes the current drawn balance plus any further amount that is expected to be drawn up to the current contractual limit by the time of default, should it occur.

• Loss Given Default (LGD) represents the Group’s expectation of the extent of loss on a defaulted exposure. LGD varies by type of counterparty, type and seniority of claim and availability of collateral or other credit support. LGD is expressed as a percentage loss per unit of exposure at the time of default (EAD). LGD is calculated on a 12-month or lifetime basis, where 12-month LGD is the percentage of loss expected to be made if the default occurs in the next 12 months and Lifetime LGD is the percentage of loss expected to be made if the default occurs over the remaining expected lifetime of the loan.

The ECL is determined by projecting the PD, LGD and EAD for each future month and for each individual exposure or collective segment. These three components are multiplied together and adjusted for the likelihood of survival (i.e. the exposure has not prepaid or defaulted in an earlier month). This effectively calculates an ECL for each future month, which is then discounted back to the reporting date and summed. The discount rate used


40 Cavmont Capital Holdings Zambia PlcAnnual Report For the year ended 30 June 2019Notes (continued)


in the ECL calculation is the original effective interest rate or an approximation thereof.

The Lifetime PD is developed by applying a maturity profile to the current 12M PD. The maturity profile looks at how defaults develop on a portfolio from the point of initial recognition throughout the lifetime of the loans. The maturity profile is based on historical observed data and is assumed to be the same across all assets within a portfolio and credit grade band. This is supported by historical analysis.

The 12-month and lifetime EADs are determined based on the expected payment profile, which varies by product type.

• For amortising products and bullet repayment loans, this is based on the contractual repayments owed by the borrower over a 12month or lifetime basis. This will also be adjusted for any expected overpayments made by a borrower. Early repayment/refinance assumptions are also incorporated into the calculation.

• For revolving products, the exposure at default is predicted by taking current drawn balance and adding a “credit conversion factor” which allows for the expected drawdown of the remaining limit by the time of default. These assumptions vary by product type and current limit utilisation band, based on analysis of the Bank’s recent default data.

The 12-month and lifetime LGDs are determined based on the factors which impact the recoveries made post default. These vary by product type.

• For secured products, this is primarily based on collateral type and projected collateral values, historical discounts to market/book values due to forced sales, time to repossession and recovery costs observed.

• For unsecured products, LGD’s are typically set at product level due to the limited differentiation in recoveries achieved across different borrowers. These LGD’s are influenced by collection strategies, including contracted debt sales and price.

Measuring ECL – Explanation of inputs, assumptions and estimation techniques

Forward-looking economic information is also included in determining the 12-month and lifetime PD, EAD and LGD. These assumptions vary by product type.

The assumptions underlying the ECL calculation – such as how the maturity profile of the PDs and how collateral values change etc, are monitored and reviewed on a quarterly basis.

There have been no significant changes in estimation techniques or significant assumptions made during the reporting period.

Forward-looking information incorporated in the ECL models

The assessment of SICR and the calculation of ECL both incorporate forward-looking information. The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses for each portfolio.

These economic variables and their associated impact on the PD, EAD and LGD vary by financial instrument. Expert judgment has also been applied in this process. Forecasts of these economic variables (the “base economic scenario”) are provided by the Economics team on a quarterly basis and provide the best estimate view of the economy over the next five years. After five years, to project the economic variables out for the full remaining lifetime of each instrument, a mean reversion approach has been used, which means that economic variables tend to either a long run average rate (e.g. for unemployment) or a long run average growth rate (e.g. GDP) over a period of two to five years. The impact of these economic variables on the PD, EAD and LGD has been determined by performing statistical regression analysis to understand the impact changes in these variables have had historically on default rates and on the components of LGD and EAD.

Economic variable assumptions

The most significant period-end assumptions used for the ECL estimate as at 30 June 2019 are the GDP, inflation and sovereign rating.

Maximum exposure to credit risk – Financial instruments subject to impairment

For ECL purposes, the bank’s financial asset is segmented into sub-portfolios are listed below:

- Retail loan portfolio

- Wholesale loan portfolio

- Investment securities

- Placement with other banks

- Off balance sheet exposures

The following table contains an analysis of the credit risk exposure of financial instruments for which an ECL allowance is recognised. The gross carrying amount of financial assets below also represents the Bank’s maximum exposure to credit risk on these assets.

• Retail loan portfolio

2019 2018 (IAS 39)

ECL staging Stage 1 Stage 2 Stage 3 Total Total

Credit grade

Pass 175,796 - - 175,796 75,204

Substandard - 17,478 - 17,478 18,147

Loss - - 18,294 18,294 21,076

Gross carrying amount 175,796 17,478 18,294 211,568 114,427

Loss allowance (7,755) (4,903) (10,486) (23,144) (4,191)

Carrying amount 168,041 12,575 7,808 188,424 110,236


41


Measuring ECL – Explanation of inputs, assumptions and estimation techniques continued

2019 2018 (IAS 39)


Credit grade

Pass 466,766 - - 466,766 244,426

Substandard - 20,508 - 20,508 228,967

Loss - - 61,293 61,293 65,653

Gross carrying amount 466,766 20,508 61,293 548,567 539,046

Loss allowance (17,797) (5,533) (27,195) (50,525) (13,616)

Carrying amount 448,969 14,975 34,098 498,042 525,430

2019 2018 (IAS 39)


Credit grade

Pass - - - - 181,657

Substandard - 210,501 - 210,501 -

Loss - - - - -

Gross carrying amount - 210,501 - 210,501 181,657

Loss allowance - (13,961) - (13,961) -

Carrying amount - 196,540 - 196,540 181,657

2019 2018 (IAS 39)


Credit grade

Pass 50,002 - - 50,002 96,278

Substandard - - - - -

Loss - - - - -

Gross carrying amount 50,002 - - 50,002 96,278

Loss allowance - - - - -

Carrying amount 50,002 - - 50,002 96,278

• Corporate loan portfolio

2019 2018 (IAS 39)


Credit grade

Pass 36,008 - - 36,008 30,241

Substandard - - - - -

Loss - - - - -

Gross carrying amount 36,008 - - 36,008 30,241

Loss allowance - - - - -

Carrying amount 36,008 - - 36,008 30,241



• Financial assets at amortised cost

• Placements with other banks

• Loan commitments


Maximum exposure to credit risk – Financial instruments subject to impairment continued

Notes (continued)


Loss allowance

The loss allowance recognised in the period is impacted by a variety of factors, as described below:

- Transfers between Stage 1 and Stages 2 or 3 due to financial instruments experiencing significant increases (or decreases) of credit risk or becoming credit-impaired in the period, and the consequent “step up” (or “step down”) between 12-month and Lifetime ECL;

- Additional allowances for new financial instruments recognised during the period, as well as releases for financial instruments de-recognised in the period;

- Impact on the measurement of ECL due to changes in PDs, EADs and LGDs in the period, arising from regular refreshing of inputs to models;

- Discount unwind within ECL due to the passage of time, as ECL is measured on a present value basis;

- Foreign exchange retranslations for assets denominated in foreign currencies and other movements; and

- Financial assets derecognised during the period and write-offs of allowances related to assets that were written off during the period.

Write-off policy

The Group writes off financial assets, in whole or in part, when it has exhausted all practical recovery efforts and has concluded there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include (i) ceasing enforcement activity and (ii) where the Bank’s method is foreclosing on collateral and value of the collateral is such that there is no reasonable expectation of recovering in full.

The Group may write-off financial assets that are still subject to enforcement activity. The contractual amount outstanding on financial assets that were written off during the reporting period and are still subject to enforcement activity is K16 million as at 30 June 2019. The Group still seeks to recover amounts it is legally owed in full, but which have been partially written off due to no reasonable expectation of full recovery.

Modification of financial assets

The Group sometimes modifies the terms of loans provided to customers due to commercial renegotiations, or for distressed loans, with a view to maximising recovery.

Such restructuring activities include extended payment term arrangements, payment holidays and payment forgiveness. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review.

Restructuring is most commonly applied to term loans.

The risk of default of such assets after modification is assessed at the reporting date and compared with the risk under the original terms at initial recognition, when the modification is not substantial and so does not result in derecognition of the original asset (refer to notes 1.2.1.1(iv) and (v) above). The Group monitors the subsequent performance of modified assets. The Group may determine that the credit risk has significantly improved after restructuring, so that the assets are moved from Stage 3 or Stage 2 (Lifetime ECL) to Stage 1 (12-month ECL). This is only the case for assets which have performed in accordance with the new terms for six consecutive months or more.

The Group continues to monitor if there is a subsequent significant increase in credit risk in relation to such assets through the use of specific models for modified assets.

Placements with other banks and other assets are classified as investment grade assets. These are with Bank Windhoek, Stanchart London, Stanchart Frankfurt, Standard corporate MB JHB , Siress, Comesa and Stanchart New York that carry an investment grade rating.

Investment securities held to maturity are debt securities issued by the Government of the Republic of Zambia.

Risk limit control and mitigation policies

The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers and to industry segments. Such risks are monitored on a regular basis and subject to annual or more frequent review. The exposure to any one borrower including Bank’s is further restricted by sub-limits covering (on-and off) statement of financial position exposures and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing lending limits where appropriate.

The Group employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced, which is common practice. The Group implements guidelines on the acceptability of specific classes of collateral or credit risk mitigation. The principal collateral types for loans and advances are:

• Mortgages over residential properties.

• Charges over business assets such as premises inventory and accounts receivable.

• Charges over financial instruments such as debt securities and equities.

Collateral held

Longer-term finance and lending to corporate entities are generally secured; revolving individual credit facilities are generally unsecured but backed by salaried payments. In addition, in order to minimise the credit loss the Bank will seek additional collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans and advances.

Collateral held as security for financial assets other than loans and advances depends on the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial instruments.

Credit related commitments

The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans.

Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments.

43


Maximum exposure to credit risk – Financial instruments subject to impairment continued

Statutory balances with Bank of Zambia

Mandatory reserve deposits are held with the Bank of Zambia in accordance with statutory requirements. These deposits are not available to finance the Group’s day-to-day operations. Assets are pledged as collateral under repurchase agreements with other banks and for security deposits relating to local futures and options. All other pledges are conducted under terms which are usual and customary to lending arrangements.

Maximum exposure to credit risk before collateral held

With the exception of the following, the maximum exposure to credit risk of financial assets is equal to their carrying amount.

Credit risk exposures relating to off-balance sheet items: 2019 2018

Undrawn commitments 36,008 30,241

Guarantee and performance bonds 7,151 3,307

Total 43,159 33,548

Management is confident in its ability to continue to control and sustain minimal exposure of credit risk to the Group resulting from both its loan and advances portfolio and debt securities based on the following:

• the Group exercises stringent controls over the granting of new loans.

• 84% of the loans and advances portfolio are neither past due nor impaired.

• 90% of the loans and advances portfolio are backed by collateral.

• 100% of the investments in debt securities are government securities

Maximum exposure to credit risk before collateral held

Retail Banking

Corporate Banking

Total

Year ended 30 June 2019 Overdrafts Term loans Staff Loans Mortgages Overdrafts Term Loans

Neither past due nor impaired 1,492 122,264 41,279 10,801 118,349 348,417 642,602

Past due but not impaired 432 16,054 294 658 3,430 17,078 37,946

Individually impaired - 18,294 - - - 61,293 79,587

Gross 1,924 156,612 41,573 11,459 121,779 426,788 760,135

Less: Expected credit losses IFRS 9 (note 13)

(183) (21,383) - (1,578) (2,402) (48,123) (73,669)

Net 1,741 135,229 41,573 9,881 119,377 378,665 686,466

Retail Banking

Corporate Banking

Total

Year ended 30 June 2018 Overdrafts Term loans Staff Loans Mortgages Overdrafts Term Loans

Neither past due nor impaired 13,982 14,468 23,675 23,079 60,032 184,394 319,630

Past due but not impaired - 12,215 263 5 669 73,278 155,689 247,114

Individually impaired - 21,076 - - 3,091 62,562 86,729

Gross 13,982 47,759 23,938 28,748 136,401 402,645 653,473

Collateral held - (58,220) - (54,603) (105,324) (522,987) (741,134)

After collateral 13,982 (10,461) 23,938 (25,855) 31,077 (120,342) (87,661)

Less: allowance for impairment IAS 39 (note 13)

- (4,191) - - (561) (13,055) (17,807)

Net 13,982 (14,652) 23,938 (25,855) 30,516 (133,397) (105,468)

Loans and advances neither past due nor impaired (pass)

The credit quality of the portfolio of loans and advances that were neither past due nor impaired can be assessed by the reference to the internal rating system adopted by the Bank.




Notes (continued)


Neither past due nor impaired Retail Banking

Corporate Banking

Total

Overdrafts Termloans Staff Loans Mortgages Overdrafts Term Loans

Year ended 30 June 2019 1,492 122,264 41,279 10,801 118,349 348,417 642,602

Year ended 30 June 2019 13,982 14,468 23,675 23,079 60,032 184,394 319,630

Loans and advances past due but not impaired

Loans and advances less than 90 days past due are not considered impaired, unless other information is available to indicate the contrary. The gross amounts of loans and advances that were past due but not impaired were as follows:

Retail Banking

Corporate Banking

Total



Past due up to 30 days 432 12,843 294 - 3,430 13,659 30,658

Past due 31 – 60 days - 2,408 - 658 - 3,419 6,485

Past due 61 – 90 days - 803 - - - - 803

432 16,054 294 658 3,430 17,078 37,946



Past due up to 30 days - 4,507 220 2,709 41,318 57,443 106,197

Past due 31 – 60 days - 4,826 43 1,609 24,790 61,514 92,782

Past due 61 – 90 days - 2,882 - 1,351 7,170 36,732 48,135

- 12,215 263 5,669 73,278 155,689 247,114

Retail Banking

Corporate Banking

Total




- 18,294 - - - 61,293 79,587

Security held against impaired loans

- (15,379) - - (103,005) (118,384)




- 21,076 - - 3,091 62,562 86,729

Security held against impaired loans

- (38,220) - (5,366) (96,665) (140,251)

- (17,144) - - (2,275) (34,103) (53,522)

Loans and advances individually impaired

Of the total gross amount of impaired loans, the following amounts have been individually assessed:


45

If there were no security held against the loans as at 30 June 2019, the loan loss would have been K79.3 million (2018: K86.73million).


Statutory balances with Bank of Zambia continued


Loans and advances 2019 (K`000) % 2018 (K`000) %

Manufacturing 105,187 14 25,875 4

Wholesale and retail trade 134,509 18 137,599 21

Transport and communications 35,234 5 45,446 7

Financial services 24,542 3 98,095 15

Agricultural 56,242 7 103,337 16

Restaurant and hotels 13,632 1 5,268 1

Mining and Quarrying 10,478 1 32,898 5

Community, social and personal 207,234 28 94,796 15

Construction 68,212 9 28,798 4

Real Estate 5,893 1 21,277 3

Electricity, gas, water and energy 29,851 4 13,749 2

Other 69,121 9 46,335 7

760,135 100 653,473 100

There is a portfolio matrix which guides the Group on sector concentration which is approved by the Board of Directors. This ensures that the exposure of the various sectors is within risk appetite that has been set and is subject to annual review.

(i) Repossessed loans

The Group had repossessed collateral amounting to K0.41 million as at 30 June 2019 (June 2018: K7.88 million). The repossessed collateral is all residential and commercial property in nature and will be disposed using the legal guidelines used by the Bank.

(ii) Loans advances renegotiated

Restructuring activities include extended payment arrangements, approved external management plans, modification and deferral of payments. Restructuring policies and practices are based on indicators or criteria that in the judgement of local management, indicate that payment will most likely to continue. These policies are kept under continuous review. Restructuring is most commonly applied on term loans- in particular customer finance loans. In most cases restructuring results in the assets ceasing to be impaired.

(iii) Other financial instruments

All other financial assets which includes placements with other banks, government securities and derivatives are neither past due nor impaired. An impairment charge of K13.96 million has been charged on these financial assets (2018: Nil)

(c) Liquidity risk

Liquidity risk is the risk that the Group is unable to meet its payment obligations associated with its financial liabilities as they fall due and to replace funds when they are withdrawn.

The Group is exposed to daily calls on its available cash resources from overnight deposits, current accounts, maturing deposits and calls on cash settled contingencies. The Group does not maintain cash resources to meet all of these needs as experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. The Bank of Zambia requires that the Group maintains a cash reserve ratio. In addition, the Board sets limits on the minimum proportion of maturing funds available to meet such calls and on the minimum level of inter-bank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The treasury department monitors liquidity ratios on a daily basis and manages liquidity risk

The table below presents the cash flows payable by the Group under financial liabilities by remaining contractual maturities at the reporting date and from financial assets by expected maturity dates, assets used to manage liquidity risk are shown in the table below. Balances due within 12 months equal their carrying balances, as the impact of discounting is not significant.

Credit risk concentration by industry

Economic sector risk concentrations within the customer loan portfolio were as follows:


Notes (continued)


Annual Report & Financial statement Annual Report & Financial statement

47

Year ended 30 June 2019 Up to 1month

1-3months

3-12months

1-5years

Over 5Years

Total

contractual cash flows

Total

carrying amounts

Liabilities

Customer deposits 457,769 315,620 162,391 6,917 - 942,697 942,697

Due to other Banks 29,169 - 128,550 - - 157,719 157,719

Redeemable Preference Shares 143,006 143,006 126,006

Other liabilities 24,631 - - - - 24,631 24,631

Guarantees, performance bonds and undrawn commitments

43,159 - - - - 43,159 43,159

Total financial liabilities (Contractual maturity dates)

554,728 315,620 290,941 6,917 143,006 1,311,212 1,294,212

Assets

Cash and balances with Bank of Zambia

134,578 - - - - 134,578 77,551

Placements with other banks 50,002 - - - - 50,002 96,278


52,144 9,747 45,432 652,812 - 760,135 686,466


- 5,000 201,651 9,500 - 216,151 196,540

Other assets 68,095 - - - - 68,095 68,095

Total financial assets (expected maturity dates)

304,819 14,747 247,083 662,312 - 1,228,961 1,124,930

Net Liquidity gap (249,909) (300,873) (43,858) 655,395 (143,006) (82,251) (169,282)


1-3months

3-12months

1-5years

Over 5Years

Total


Total

carrying amounts

Liabilities

Customer deposits 441,696 283,929 164,440 755 - 890,820 890,820

Due to other Banks 138,168 - - - - 138,168 138,168

Redeemable Preference Shares 55,006 55,006 50,006

Other liabilities 11,120 - - - - 11,120 11,120

Guarantees, performance bonds and undrawn commitments

33,548 - - - - 33,548 33,548

Total financial liabilities (Contractual maturity dates)

624,532 283,929 164,440 755 55,006 1,128,662 1,123,662

Assets


77,551 - - - - 77,551 77,551



137,309 15,528 4,927 495,709 - 653,473 635,666


5,142 12,233 168,974 7,802 - 194,150 181,657

Other assets 83,376 - - - - 83,376 83,376

Total financial assets

(expected maturity dates) 399,656 27,761 173,901 503,511 - 1,104,828 1,074,528

Net Liquidity gap (224,876) (256,168) 9,461 502,756 (55,006) (23,834) (49,134)

(Amounts in K’000 unless otherwise indicated)(c) Liquidity risk (continued)


At 30 June 2019 USD GBP EURO ZAR Total

Assets

Cash and balances with Bank of Zambia 34,790 122 364 3,968 39,244

Placements with other banks 35,077 9,564 1,185 4,176 50,002

Loans and advances to customers 298,557 - - - 298,557

Total assets 368,424 9,686 1,549 8,144 387,803

Liabilities

Customer deposits 295,374 8,812 330 3,529 308,045

Other liabilities 128,550 - - - 128,550

Total liabilities 423,924 8,812 330 3,529 436,595

Net on-balance sheet position 55,500 874 1,219 4,615 48,792

Net off-balance sheet position 3,569 - - - 3,569

Overall open position 59,069 874 1,219 4,615 52,361

The Group holds a diversified portfolio of cash and high-quality highly-liquid securities to support payment obligations and contingent funding in a stressed market environment. The liquidity gaps are monitored on a weekly basis in line with the Group’s treasury policies. Depending on the resulting need, the Group employs different strategies to manage the liquidity gaps as advised by its Assets and Liability committee (ALCO). These strategies include, but not limited to, making use of committed credit lines and borrowing facilities from its ultimate parent company as well as through the inter-bank operations

(d) Market risk

Market risk is the risk that changes in market prices, which include currency exchange rates and interest rates, will affect the fair value or future cash flows of a financial instrument. Market risk arises from open positions in interest rates and foreign currencies, both of which are exposed to general and specific market movements and changes in the level of volatility. The objective of market risk management is to manage and control market risk exposures within acceptable limits, while optimising the return on risk. Overall responsibility for managing market risk rests with the Assets and Liabilities Committee (ALCO), the Board Audit Committee (BAC) and the Board. The treasury department is responsible for the development of detailed risk management policies (subject to review and approval by ALCO) and for the day to day implementation of those policies.

Currency risk

The Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Board sets limits on the level of exposure by currency and in total for both overnight and intra-day positions, which are monitored daily.

The table below summarises the Group’s exposure to foreign currency exchange rate risk at the end of 30 June 2019 and 30 June 2018. Included in the table are the bank’s financial instruments, categorised by currency

At 30 June 2018 USD GBP EURO ZAR Total

Assets

Cash and balances with Bank of Zambia 48,207 4,724 1,732 10,301 64,964

Placements with other banks 171 - - - 171

Loans and advances to customers 246,375 - - - 246,375

Total assets 294,753 4,724 1,732 10,301 311,510

Liabilities

Customer deposits 138,103 3,883 1,252 9,157 152,395

Other liabilities 151,636 582 - 3 152,221

Total liabilities 289,739 4,465 1,252 9,160 304,616

Net on-balance sheet position 5,014 259 480 1,141 6,894

Net off-balance sheet position 1,504 - - - 1,504

Overall open position 6,518 259 480 1,141 8,398


Notes (continued)

(c) Liquidity risk (continued)


49

At 30 June 2019, if the currency had weakened/(strengthened) by 5% against the US Dollar with all other variables held constant, pre-tax profit for the year and equity would have been K0.38 million (2018: K1.06 million) lower/higher, mainly as a result of US Dollar deposits, loans and placements with other banks. The impact of fluctuations of other foreign currencies is becoming more significant as the Group’s foreign currency book grows. The direction of the ALCO of the Group is therefore to maintain a square position to avoid income statement fluctuations as a result of the movement in the exchange rate.

Interest rate risk

The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on both its fair value and cash flow risks. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Board of Directors sets limits on the level of mismatch of interest rate re-pricing that may be undertaken, which is monitored daily.

The table below summarises the Group ’s exposure to interest rate risks. Included in the table are the Group’s assets and liabilities at carrying amounts, categorised by the earlier of contractual re-pricing or maturity dates. The Group does not bear any interest rate risk on off balance sheet items. All figures are in thousands of Kwacha.


1-3months

3-12months

Over 1year

Non-interestbearing

Total


Total

carrying amounts

Assets


- - - - 134,578 134,578 134,578


Loans and advances to customers 52,144 9,747 45,432 652,812 - 760,135 686,466


- 5,000 201,651 9,500 - 216,151 196,540

Other assets - - - - 68,095 68,095 68,095

Total financial assets 102,146 14,747 247,083 662,312 202,673 1,228,961 1,135,681

Liabilities

Customer deposits 457,769 315,620 162,391 6,917 - 942,697 942,697

Due to other banks 29,169 - 128,550 - - 157,719 157,719

Redeemable preference - - 143,006 - - 126,006

shares 143,006

Other liabilities - - - - 26,141 26,141 26,141

Total financial liabilities 486,938 315,620 290,941 149,923 26,141 1,269,563 1,252,563

Interest re-pricing gap (384,792) (300,873) (43,858) 512,389 176,532 (40,602) (116,882)


Currency risk (continued)


1-3months

3-12months

Over 1year

Non-interestbearing

Total


Total

carrying amounts

Assets


- - - - 77,551 77,551 77,551


Loans and advances to customers 137,309 15,528 4,927 495,709 - 653,473 635,666


5,142 12,233 156,480 7,802 - 181,657 181,657

Other assets - - - - 83,376 83,376 83,376

Total financial assets 238,729 27,761 161,407 503,511 160,927 1,092,335 1,074,528

Liabilities

Customer deposits 441,696 283,929 164,440 755 - 890820 890,820

Due to other banks 138,168 - - - - 138,168 138,168

Redeemable preference - - - - - - -

shares 55,006 55,006 50,006

Other liabilities - - - - 11,120 11,120 11,120

Total financial liabilities 579,864 283,929 164,440 55,761 11,120 1,095,114 1,090,114

Interest re-pricing gap (341,135) (256,168) (3,033) 452,750 149,807 (2,779) (15,586)

The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for the Group to ever be completely matched since business transacted is often of uncertain terms and of different types, an unmatched position potentially enhances profitability, but can also increase the risk of losses.

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Bank and its exposure to changes in interest rates and exchange rates.

(e) Capital management

Capital management is a key contributor to shareholder value. The Group’s objectives when managing capital, which is a broader concept than the ‘equity’ on the statement of financial positions, are:

• To comply with the capital requirements set by the Banking and Financial Services Act 1991(as amended)

• To safeguard the Bank’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;

• To maintain a strong capital base to support the development of its business.

• To allocate capital to businesses using risk-based capital allocation, to support the banks’ strategic objectives, including optimising returns on shareholder and regulatory capital; and

• Maintain the dividend policy and dividend declarations of the Bank while taking into consideration shareholder and regulatory expectations.

Capital adequacy and use of regulatory capital are monitored regularly by management, employing techniques based on the guidelines developed by the Basel Committee, as implemented by the Bank of Zambia for supervisory purposes. The required information is filed with the Bank of Zambia on a monthly basis.

The Group manages its capital base to achieve a prudent balance between maintaining capital levels to support business growth, maintaining depositor and creditor confidence, and providing competitive returns to shareholders.

The Bank of Zambia requires each local bank to:

(i) Hold the minimum level of regulatory capital of K104 million and K520 million for a foreign bank.

(ii) Maintain a ratio of total regulatory capital to the risk-weighted assets plus risk-weighted off statement of financial position items.

(iii) Assets (the ‘Basel ratio’) at or above the required minimum of 10%;

(iv) Maintain primary or tier 1 capital of not less than 5% of total risk weighted assets; and

(v) Maintain total capital of not less than 10% of risk- weighted assets plus risk-weighted off-statement of financial position items.

Regulatory capital adequacy is measured through a risk based ratio:

• Tier 1 capital (primary capital): common shareholders’ equity, qualifying preferred shares, non-distributable reserves and retained reserves.

• Tier 2 capital (secondary capital): qualifying preferred shares, 40% of revaluation reserves, subordinated term debt or loan stock with a minimum original term of maturity of over five years (subject to a straight-line amortisation during the last five years leaving no more than 20% of the original amount outstanding in the final year before redemption) and other capital instruments which the Bank of Zambia may allow. The maximum amount of secondary capital is limited to 100% of primary capital.

Risk-weighted assets are determined on a granular basis by using risk weights calculated from internally derived risk parameters within the regulatory requirements.

The risk weighted assets are measured by means of a hierarchy of four risk weights classified according to the nature of and reflecting an estimate of the credit risk associated with each asset and counterparty. A similar treatment is adopted for off-statement of financial position exposure, with some adjustments to reflect the more contingent nature of the potential losses.

The Group has complied with all externally imposed capital requirements throughout the year, on 30 January 2012, the Bank of Zambia issued Circular 02/2012 on a new capital adequacy framework. This entailed



Interest rate risk (continued)


reclassification of commercial banks into locally owned banks and foreign banks. The minimum capital was revised upwards to K520 million for foreign-owned banks and K104 million for locally-owned banks. In addition, for a Bank to be classified as locally owned, it was stated as a requirement that the majority shareholders of a local bank should be Zambians and only a maximum of 49% can be held by foreign institutions. The bank opted to convert to a local bank and was given a concession up to 31 December 2018 to transfer the majority equity stake to Zambian citizens.

The Group has since engaged the Bank of Zambia to extend this concession until such a time that the shares in the special purpose vehicle have been purchased by members of the public. The Parent company will continue to support the subsidiary throughout this process. While the Bank continues to engage Bank of Zambia for an extension, the central bank has not provided any formal feedback with regards to the request and with regards to its future decisions.

There have been no material changes in the Group’s management of capital during the year. The minimum capital for the Bank is 10% of the Risk Weighted Assets as computed.

The table below summarises the composition of regulatory capital and the ratios of the Bank as at 30 June 2019 as per Bank of Zambia prudential returns

2019 2018

Tier 1 capital 137,143 117,656

Tier 1 +Tier 2 capital 140,450 120,963

Risk-weighted assets

On-balance sheet 885,313 705,110

Off-balance sheet 43,159 33,548

Total risk-weighted assets 928,472 738,658

Basel ratio

Tier 1 (Regulatory minimum – 5%) 14.77% 15.92%

Tier 1 + Tier 2 (Regulatory minimum – 10%) 15.14% 16.37%

Non-performing or restructured loans whose individual values exceeded 5% of the Bank’s regulatory capital

The Group had 4 loans whose individual values exceeded 5% of the Banks regulatory capital. The breach in the limit was caused by the Bank’s capital being eroded by the accumulation of losses

(f) Fair values of financial assets and liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date i.e. an exit price. Fair value is therefore a market based measurement and when measuring fair value the Bank uses the assumptions that market participants would use when pricing an asset or liability under current market conditions, including assumptions about risk. When determining fair value it is presumed that the Bank is a going concern and the fair value is therefore not an amount that represents a forced transaction, involuntary liquidation or a distressed sale.

Recurring fair value measurements

Recurring fair value measurements are those for assets and liabilities that IFRS requires or permits to be recognized at fair value and are recognized in the statement of financial position at reporting date.

Fair value of financial instruments

Where the Group has any financial liability with a demand feature, such as demand deposits, the fair value is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid where the time value of money is significant.

Non-financial assets

When determining the fair value of a non-financial asset, a market participant’s ability to generate economic benefits by using the assets in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use, is taken into account. This includes the use of the asset that is physically possible, legally permissible and financially feasible.

Other fair value measurements

Other fair value measurements include assets and liabilities not measured at fair value but for which fair value disclosures are required under another IFRS e.g. financial instruments at amortised cost. The fair value for these items is determined by using observable quoted market prices where these are available or in accordance with generally acceptable pricing models such as a discounted cash flow analysis.

The Group classifies assets and liabilities measured at fair value using a fair value hierarchy that reflects whether observable or unobservable inputs are used in determining the fair value of the item. If this information is not available, fair value is measured using another valuation technique that maximises the use of relevant observable inputs and minimises the use of unobservable inputs. The valuation techniques employed by the Group include, inter alia, quoted prices for similar assets or liabilities in an active market, quoted prices for the same asset or liability in an inactive market, adjusted prices from recent arm’s length transactions, option-pricing models, and discounted cash flow techniques. Where a valuation model is applied and the Group cannot mark to market, it applies a mark-to-model approach, subject to prudent valuation adjustments. Mark-to-model is defined as any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input. When applying mark-to-model, an extra degree of conservatism is applied.


51

(e) Capital management (continued)

The following represents the fair values of financial instruments not carried at fair value on the statement of financial position. For all other instruments the carrying value is equal to or a reasonable approximation of the fair value.

At 30 June 2019 Carrying value Fair Value

Assets

Loans advances at amortised cost 686,466 686,466

Financial assets at amortised cost 196,540 196,540

Total assets 883,006 883,006

Liabilities

Total deposits and current accounts at amortised cost 942,697 942,697

Off balance sheet items financial instruments 43,159 43,159

At 30 June 2018

Assets

Loans advances at amortised cost 635,666 635,666


Total assets 817,323 817,323

Liabilities

Total deposits and current accounts at amortised cost 890,820 890,820

Off balance sheet items financial instruments 33,548 33,548

Fair value hierarchy

Observable inputs reflect market data obtained from independent sources; unobservable inputs reflect the Bank market assumptions. These two types of inputs have created the following fair value hierarchy:

• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, Lusaka Stock Exchange) and exchanges traded derivatives like futures.

• Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices). This level includes the swaps and forwards. The sources of input parameters like LIBOR yield curve or counterparty credit risk is the Bank of Zambia.

• Level 3 – inputs for the asset or liability that are not based on observable market data (unobservable inputs). This level includes debt and loans receivable with significant unobservable components. Some of the key assumptions includes tenor, income per square meter and credit inputs.

This hierarchy requires the use of observable market data when available. The bank considers relevant and observable market prices in its valuations where possible.

For assets whose fair value is equal to the carrying amounts, the fair value disclosures as above are analysed as follows in the fair value hierarchy;

At 30 June 2019 Level 1 Level 2 Level 3

Loans and advances - - 686,466

Financial assets at amortised cost - 196,540 -

Placement with other banks - - 50,002

Total Assets - 196,540 736,468

At 30 June 2018

Loans and advances - - 635, 666

Financial assets at amortised cost - 181,657 -

Placement with other banks - - 96,278

Total Assets - 181,657 731,944

At 30 June 2019, the Bank did not have financial liabilities measured at fair value (2018: nil).



Other fair value measurements (continued)


Fair Value Estimation of Non-financial assets

An independent valuation of the Group’s buildings was performed by valuers to determine the fair-value of the buildings. The land and building were valued using the income method of valuation which was adopted as the most appropriate as the property is commercial in nature. The key assumption in arriving at the value was the rental amount per square meter. The following table analyses by hierarchy.

At 30 June 2019 Level 1 Level 2 Level 3

Land and buildings - - 12,050

At 30 June 2018

Land and buildings - - 12,050

All fair value measurements disclosed are recurring fair value measurements, required for the purposes of measuring the Bank’s assets at fair value. During the year no transfers were made amongst the different levels

Instrument Level Valuation technique

Description Observable inputs

Unobservable inputs

Loans and advances 3 Discounted cash flows

Future cash flows discounted using a market related interest rate adjusted for credit inputs, over the contractual

period.

Market interest rates

and curves.

Credit inputs

Financial assets at amortised cost 3 Discounted cash flows

Future cash flows discounted using an effective interest rate. This is the rate

that exactly discounts estimated future cash receipts(including all fee

and points paid or received that form an integral part of the effective

interest rate

Market interest rates

and curves

Not applicable

2019 2018

Loans and advances to customers 123,147 106,936


Short term funds 816 1,674

159,200 136,371


Deposits due to banks 14,798 7,072

76,365 74,057


53

Fee and commission income

Credit related fees and commissions 14,648 21,444

Account management fees 15,687 16,809

30,335 38,253

Fee and commission expense

VISA related fees (10,836) (7,176)

19,499 31,077

5. Interest income

6. Interest expense

7. Net fee and commission incomeincome

The tax on the Bank’s profit before income tax differs from the theoretical amount that would arise using the statutory income tax rate as follows:

Advertising and publicity 4,531 3,313

Insurance 2,128 1,590

Legal and consultancy fees 13,350 6,593

Maintenance & Utilities 2,580 8,026

Operational losses 2,068 7,970

Security 6,339 4,781

Travel & accommodation 5,165 2,765

Other 8,817 7,160

Infrastructure spend 1,199 2,402

86,503 74,783

2019 2018

The following items are included within employee benefits expense:

Wages and salaries 51,335 42,867

Other staff costs 18,157 16,328

Retirement benefit expense:

-CCBL pension scheme contributions 5,196 2,992

-National Pension Scheme Authority 2,161 1,681

76,849 63,868

2019 2018

Current income tax 57 102

Prior year (54) -

Deferred income tax (note 17) (768) (8,767)

(765) (8,665)

2019 2018

(Loss) / Profit before income tax (15,823) (50,320)

Tax calculated at the statutory income tax rate of 35% (5,538) (17,612)

Tax effect of:

Forfeited Tax loss 5,412 8,647

Expenses not deductible / (income not taxable) (696) 198

Effect of taxes from non-banking activities 57 102

Income tax (credit) / expense (765) (8,665)

2019 2018

The following items are included within operating expenses:

Depreciation on property and equipment (note 15) 6,665 6,383

Amortisation of intangible assets (note 16) 1,633 1,168

Operating lease rentals 9,982 9,558

Auditors’ remuneration 1,320 1,754

Auditors’ remuneration ( non audit services) 240 144

Other IT support and maintenance costs 9,218 6,866

Telecommunications 11,268 4,310



8. Operating expenses

9. Employee benefits expense

10. Income tax


Current income tax movement in the statement of financial position 2019 2018

At start of period (14,910) (11,250)

Current income tax 57 102

Tax paid during the period (3,741) (3,762)

Under /over from prior period (54) -

At end of period (18,648) (14,910)

An analysis of the bank’s tax losses is as follows: Amount Tax impact

2018 tax loss expiring in 2024 50,880 17,808

2019 tax loss expiring in 2025 11,705 4,097

62,585 21,905

Group Company

2019 2018 2019 2018

Cash in hand 71,659 46,867 106 102

Balances with Bank of Zambia 63,040 30,684 - -

Less: Impairment provision (15) - - -

Total 134,684 77,551 106 102

2019 2018

Gross carrying amount

ECL Allowance Carrying amount Gross carrying amount

Impairment Allowance

Carrying amount

K'000 K'000 K'000 K'000 K'000 K'000

Corporate lending 548,567 (50,525) 498,042 539,046 (13,616) 525,430

Retail lending 211,568 (23,144) 188,424 114,427 (4,191) 110,236

Total 760,135 (73,669) 686,466 653,473 (17,807) 635,666

Restricted cash

The cash and cash equivalents disclosed above and in the statement of cash flows include balances with bank of Zambia. These deposits are subject to regulatory restrictions and are therefore not available for general use by the bank. At year end the Bank of Zambia reserve ratio was 5% (2018: 5%). The bank’s restricted cash is K48,140 (2018:K44,541)

2019 2018

Items in the course of collection (10,077) 41,278

Deposits with other banks 60,079 55,000

Current 50,002 96,278

The table below shows the ECL charges on financial instruments for the year recorded in the income statement.


55

Stage 1 Stage 2 Stage 3 Total

K'000 K'000 K'000 K'000

Loans and advances to customers 1,510 (20,970) 2,233 (17,227)

Other Financial Instruments - 9,699 - 9,699

1,510 (11,271) 2,233 (7,528)

13. Loans and advances to customers

11. Cash and balances with Bank of Zambia

12. Placements with other banks

(a) Financial assets at amortised cost – Group 2019 2018

Government securities

- Current 191,850 162,506

-Non-current 18,651 19,151

Less: Impairment (13,961) -

196,540 181,657

(b) Investment in subsidiary – Company 2019 2018

At start of the year 149,750 149,750

At end of the year 149,750 149,750

Loss allowance as at 1 July 2018 18,805 34,340 49,728 102,873

Changes in the loss allowance

– Transfer to stage 1 (2,093) 3,227 (1,134) -

– Transfer to stage 2 9,155 5,653 (14,808) -

– Transfer to stage 3 - (20,239) 20,239 -

– Write-offs - - (16,344) (16,344)

New financial assets originated or purchased 13,582 - - 13,582

Financial assets that have been derecognised - - -

Foreign exchange and other movements (13,898) (12,544) - (26,442)

Loss allowance as at 30 June 2019 25,551 10,437 37,681 73,669

14 Financial assets at amortised cost

The financial assets listed are treasury bills and government Bonds. At 30 June 2019, the Bank had K183.37 million (2018: K171.24 million) in treasury bills pledged to cover deposits with customers and clearing activities with the Zambia Electronic Clearing House.

The Company’s interest in its subsidiary, which is unlisted and which has the same year end was as follows:

Country of incorporation

% interest held 2019 2018

Cavmont Bank Limited Zambia 100 149,750 149,750

The fair value of the investment in subsidiary is K149,597 (2018: K149,597)

(i) On Balance sheet Stage 1 Stage 2 Stage 3 Total

12m - ECL K’000 LTECL K’000 LTECL K’000 K’000

Gross carrying amount as at 1 July 2018 454,488 118,165 80,820 653,473

Changes in the gross carrying amount

– Transfer to stage 1 40,672 (39,350) (1,322) -

– Transfer to stage 2 (14,558) 15,049 (491) -

– Transfer to stage 3 - (16,924) 16,924 -

New financial assets originated or purchased 221,432 - - 221,432

Financial assets that have been derecognised - - - -

Write-offs - - (16,344) (16,344)

Other changes (59,432) (38,994) - (98,426)

Gross carrying amount as at 30 June 2019 642,602 37,946 79,587 760,135

(a) Analysis of gross carrying amount



13. Loans and advances to customers (continued)


Buildings LeaseholdImprove-

ments

Motor

vehicles

Fixtures,

fittings &

equipment

Capitalwork in

progress

Total


Opening net book value amount 12,042 4,782 961 11,228 5,758 34,771

Additions - 311 - 9,832 - 10,143

Reclassification to intangible assets - - - - (2,359) (2,359)

Write off - - - - (35) (35)

Depreciation charge (178) (435) (459) (5,311) - (6,383)

Closing net book value amount 11,864 4,658 502 15,749 3,364 36,137

At 30 June 2018

Cost or valuation 12,050 9,577 3,097 53,434 3,364 81,522

Accumulated depreciation (186) (4,919) (2,595) (37,685) - (45,385)

Net book amount 11,864 4,658 502 15,749 3,364 36,137


Opening net book value amount 11,864 4,658 502 15,749 3,364 36,137

Additions - 59 - 1,282 1,975 3,316

Adjustments in the period (55) 37 - 1,013 (1,145) (150)

Disposals - - (493) - - (493)

Depreciation charge (241) (401) 107 (6,130) - (6,665)

Closing net book value amount 11,568 4,353 116 11,914 4,194 32,145

At 30 June 2019

Cost or valuation 12,050 9,441 2,604 55,009 4,194 83,298

Accumulated depreciation (482) (5,088) (2,488) (43,095) - (51,153)

Net book amount 11,568 4,353 116 11,914 4,194 32,145

There are no leased assets included in property plant and equipment (2018: nil).

In accordance with section 193 of the Zambia Companies Act, 1994 (as amended) the register of Lands and Buildings is available for inspection by members and their duly authorised agents at the Registered Records Office of the Bank

An independent valuation of the buildings was performed by Messrs R M Fumbeshi to determine the fair value of the land and buildings as at 30 June 2017. The revaluation surplus net of applicable deferred income taxes was credited to other comprehensive income and is shown in shareholders’ equity. The revaluation surplus represents solely the surplus on the revaluation of buildings and is non-distributable. The movement in the revaluation surplus on buildings is as below:


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2019 2018

At beginning of year 8,268 8,268

Revaluation gain for the year - -

At end of year 8,268 8,268

15. Property and equipment

2019 2018

At start of year 17,514 12,044

Prior year adjustment 1,196 (3,297)

Credit /(charge) to statement of comprehensive income (428) 8,767

Credit / (charge) to equity 31,344 -

At end of year 49,626 17,514

Cost 17,624

Accumulated amortisation (4,519)

Net book amount 13,105


At Start of the year 14,738

Additions -

Work in progress -

Amortisation (1,633)

At end of the year 13,105

2019 2018

Cost 2,130 2,130

Accumulated depreciation (879) (836)

Net book value at end of the year 1 251 1 294

17. Deferred tax asset

Deferred income tax is calculated using the enacted income tax rate of 35% (2018: 35%). The movement on the deferred tax asset is as follows:

At 30 June 2018 K`000

Cost 17,624

Accumulated amortisation (2,886)

Net book amount 14,738


At Start of the year 9,992

Additions 3,555

Work in progress 2,359

Amortisation (1,168)

At end of the year 14,738



The fair value of business buildings was determined using the income method of valuation which was adopted as the most appropriate as the properties are commercial in nature. The carrying amount of the revalued properties if carried under cost model would be as follows:

Notes (continued)

15. Property and equipment (continued)

16. Intangible assets-computer software


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At start of the year P/L Prior year Charged/

(credited)

to P/L

Charged/

(credited)

to equity

At end of year


Property and Equipment

- on cost 4,991 (243) (181) - 4,567

- on valuation (243) - - - (243)

Tax loss carried forward (22,262) (953) 1,310 - (21,905)

Expected Credit loss - - - (31,344) (31,344)

Other timing differences - - (701) - (701)

(17,514) (1,196) 428 (31,344) (49,626)

At 30 June 2018

Property and equipment

- on cost 2,621 1,839 531 - 4,991

- on valuation (243) - - - (243)

Tax loss carried forward (14,422) 1,458 (9,298) - (22,262)

(12,044) 3,297 (8767) - (17,514)

The deferred tax asset, deferred income tax charge in the statement of comprehensive income, and deferred income tax charge in equity are attributable to the following items:

The recognition of the deferred income tax asset is dependent on the ability of the bank to make taxable profits sufficient to utilise the tax losses carried forward before they begin to expire in December 2019. The directors have put in place certain measures, enumerated in note 2 to the financial statements that will result in the bank having sufficient taxable profits for the foreseeable future.

The charge to equity for the represents deferred tax recognised on adoption of IFRS 9 on 01 July 2018.

The analysis of deferred tax assets is as follows:

Deferred tax asset on losses carried forward 2019 2018

Deferred tax assets to be recovered within 12 months 701 3,956

Deferred tax assets to be recovered after 12 months 53,249 18,306

53,950 22,262

Group

2019 2018

Company

2019 2018

Clearing items 21,465 55,857 - -

Other receivables 46,585 27,202 - 109

Prepayments 3,367 8,205 - -

71,417 91,234 - 109

The tax rate was 35% during the current financial year and therefore, deferred tax asset at 30 June 2019 was measured at 35%. The recognition of the deferred income tax asset is dependent on the ability of the Bank to make taxable profits sufficient to utilise the tax losses carried forward. The Directors have put in place certain measures, enumerated in note 2 to the financial statements, which will result in the Bank having sufficient taxable profits for the foreseeable future.

Commission receivable, prepayments and the foreign currency swaps are all classified as current. Other receivables are made up of RGTS item, Visa clearing accounts, Intersystem clearing accounts and other similar items.


17. Deferred tax asset (continued)

18. Other Assets -


During the year, the Group issued K 76.00 million in the form of 20 years non-convertible preference shares in order to augment its capital to comply with the regulatory requirements of the Bank of Zambia. The shares were issued at a par value of K0.01 per share and a premium of K9, 999.99 per share. The shares are mandatorily redeemable at their par value on 22 November 2039 and pay a dividend at the Namibian Prime Rate less 0.75% (currently 10%) per annum as at 30 June 2019 (2018: Namibian Prime Rate less 0.75% currently at 10%). There was no dividend paid during the period.

(b) Net debt reconciliation

2019 2018

(a) Preference share capital 126,006 50,006

Term 2019 Cash flow 2018

Long term borrowings 50,006 76,000 126,006

Short term liabilities 138,168 19,551 157,719

Total Liabilities 188,174 95,551 283,725

23. Preference share capital

Group

2019 2018

Comapny

2019 2018

Amounts due to group companies (Note 28) 128,550 129,454 -

Loans from other banks 29,169 8,714 -

157,719 138,168 -

Other payables and accruals 26,141 11,073 - 364

Current 183,860 149,241 - 364

2019 2018

(Loss)/profit attributable to equity holders of the Group (15,823) (41,655)

Weighted average number of ordinary shares in issue 114,046 114,046

Basic (loss) earnings per share (Kwacha per share) (0.139) (0.365)

21. Earnings per share – Group

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Group by the weighted average number of ordinary shares outstanding. There were no potentially dilutive shares outstanding at 30 June 2019 (June 2018: Nil). Diluted earnings per share is therefore the same as basic earnings per share.

The authorised share capital of the Group remained unchanged at 135 million ordinary “A” shares of K0.001 each. The issued and fully paid-up share capital remained at 114, 046 ,000 ordinary “A” shares of K0.001 each.

Number of shares Issued and fully paid up Share premium


Balance at 30 June 2019 and 30 June 2018 135,000 114,046 35,508


2019 2018

Current and demand deposits 368,947 258,593

Savings accounts 93,105 83,756

Fixed deposit accounts 438,345 454,839

Call accounts 42,194 93,530

942,591 890,718

Current 935,674 889,963

Non-Current 6,917 755

942,591 890,718

Notes (continued)

19. Customer deposits

20. Other liabilities

22. Share capital and premium


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2019 2018

Balance at start and end of the year 3,327 3,327

Contingent liabilities 2019 2018

Undrawn commitments 36,008 30,241

Guarantees and performance bonds 7,151 3,307

43,159 33,548

2019 2018

Not later than one year 2,632 9,135

Later than 1 year and not later than 5 years 13,987 13,253

16,619 22,388

27. Analysis of cash and cash equivalents as shown in the statement of cash flows 2019 2018

Cash and balances with Bank of Zambia (note 11) 134,684 77,551

Placements with other banks (note 12) 50,002 96,278

184,686 173,829

Less: cash reserve requirement (see below) (48,140) (44,541)

136,546 129,288

The non-distributable reserve arose on the merger of entities into Cavmont Bank Limited between Cavmont Merchant Bank and New Capital Bank in January 2004. This will remain the same as it cannot be distributed to shareholder as dividend.

25. Off-balance sheet contingent liabilities and commitments

In common with other banks, the Group conducts business involving acceptances, letters of credit, guarantees, performance bonds and indemnities. The majority of these facilities are offset by corresponding obligations of third parties. In addition, there are other off-balance sheet financial instruments including forward contracts for the purchase and sale of foreign currencies, the nominal amounts for which are not reflected in the statement of financial position.


Nature of commitments

Commitments to lend are agreements to lend to a customer in future subject to certain conditions. Such commitments are normally made for a fixed period. The Group may withdraw from its contractual obligation for the undrawn portion of agreed overdraft limits by giving reasonable notice to the customer.

26. Operating lease commitments

The future minimum lease payments under non-cancellable operating leases are as follows:

For the purposes of the statement of cash flow, cash and cash equivalents comprise balances with less than 90 days maturity from the date of acquisition including: cash and balances with the central bank, treasury bills and other eligible bills, and amounts due from other banks. Cash and cash equivalents exclude the cash reserve requirement held with the Bank of Zambia.

Cash reserve requirement

The Group is required to maintain a prescribed minimum cash balance with the Bank of Zambia that is not available to finance the Group’s day-to-day activities. The amount is determined as 5% (2018: 5%) of the customer deposits at the statement of financial position date held with bank of Zambia.

28. Related party transactions

A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and foreign currency transactions. The volume of related party transactions, outstanding balances at the year end, and relating expenses and income for the year are as follows:

24. Non distributable reserve (Group)


Segment information 2019 2018

Interest income 159,200 136,371

Interest expense (76,365) (74,057)

Net interest income 82,835 62,314

Impairment losses on loans and advances 7,528 (18,829)

Non-interest income 55,076 43,824

Other income 1,066 1,022

Operating expenses (163,352) (138,651)

Income tax expense 765 8,665

(Loss)Profit after tax (16,082) (41,655)

Total assets 1,252,739 1,165,791

Total liabilities 1,252,457 1,089,965

Key management remuneration 2019 2018

Salaries and other short-term employment benefits 15,289 10,315

Termination Benefits and Statutory contributions 1,388 393

16,677 10,708

Director emoluments 2019 2018

Fees for services as directors 1,559 1,943


There is no specific allowance for impaired loans and advances in relation to any outstanding balances to other related parties, and no expense has been recognised in respect of impaired loans and advances due from related parties and the loan is secured

Loans and advances from related parties 2019 2018

Capricorn Investment Group Limited 176,006 50,006

Bank Windhoek limited 128,550 99,650

Bank Gaborone limited - 29,895

304,556 179,551

Interest expense 11,969 7,842

Loans to directors 2019 2018

At start of the year - -

Paid during the year - -

- -

At end of the year - -

Interest income earned - -

2019 2018

Deposits by directors 770 634

Loans to related parties 5,214 5,085

Services rendered to the Group included Information Technology, Marketing and Human capital support by Capricorn Investment Group Limited.

At 30 June 2019 advances to employees amounted to K41.5 million (2018: K23.9 million)

The reduction in director’s fees as compared to prior year was as a result of some resignations which were only filled during the course of the year.

29. Segment information

Management has determined the operating segments based on the reports reviewed by the Board of Directors that are used to make strategic decisions. The board considers the activities of the Group to substantially fall within the same industry. The Board assesses the performance of the Group based on profit or loss after tax. The segment information provided to the Board of directors for the reportable segment is as follows;

The amounts provided to the Board of directors with respect to total assets and liabilities are measured in a manner consistent with that of the financial statements. All revenues are generated from customers in Zambia. All non-current assets are located in Zambia

Notes (continued)

Related party transactions (continued)


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Name of shareholder Number of shares

1 Capricorn Investment Group 56,800,000

2 Makumbi Investment ltd 54,825,000

3 Cavmont & Co. SA. 550,000

4 National Pension Scheme Authority 546,916

5 White Barry Howard 244,585

6 Madison Pension Trust Fund 142,672

7 Charles Mpundu 86,832

8 CEC Pension Trust Scheme 75,000

9 Airtel Zambia Pension Trust Scheme 75,000

10 D.G.Partners 67,682

Distribution of shareholders Number of shareholders

Number of shares % Shareholding

Less than 500 shares 217 18,798 0.02

500 – 5,000 shares 53 83,214 0.07

5,001 – 10,000 shares 8 63,984 0.06

10,001 – 100,000 shares 24 770,856 0.67

100,001 – 1,000,000 shares 4 1,484,173 1.30

Over 1,000,000 shares 3 111,625,000 97.88

Total 309 114,046,025 100.00


The Summary above does not form part of the financial statements.

APPENDIX

Principal shareholders

The ten largest shareholdings in the Company and the respective number of shares held at 30 June 2019 is as follows:


Notes

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Cavmont Capital Holdings Zambia PLC,Cavmont House,Plot No. 2374,Thabo Mbeki Road,P.O Box 38474,Lusaka, Zambia (+260) 211 360 022www.cavmont.com.zm

Cavmont Capital Holdings Zambia Plc · 03 Group Profile & Structure Cavmont Bank Ltd as a subsidary...

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