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FMB Chairman Mr Rasik C Kantaria

We are pleased to release the FMB Group annual report for the financial year ended 31 December 2014. Below is the letter from the FMB Group Chairman, Mr Rasik Kantaria.
The year 2014 saw further significant progress achieved on numerous projects undertaken to position the group for future growth in all its territories of operation. New core banking systems are now in place in Botswana, Mozambique and Zambia with Malawi on track to go live on the new system in the second quarter of 2015.
In tandem with the IT system upgrades we have successfully centralized the back office operations of each bank which initiatives together have led to enhanced controls and increased operational efficiency. Additionally, a comprehensive review of human resources was undertaken to harmonize grading and performance evaluation policies and procedures throughout the group and ensure that our terms and conditions of service and employee compensation are relevant and competitive in the markets in which we operate.

We have now completed the upgrade of the physical infrastructure of First Capital Bank, Zambia and Capital Bank, Mozambique with new modern head offices in both territories together with a renovation and refurbishment of all branches. In Zambia we have opened a new branch in the growing industrial area of Makeni in Lusaka and commenced the process of expanding our geographical outreach to the Copperbelt through the establishment of branches in Ndola (opened in March 2015) and Kitwe (opening scheduled for later in 2015).

Reserve Bank of Malawi implemented Basel II guidelines with effect from 1 January 2014 and I am pleased to report that, since implementation, we have remained compliant with the increased capital adequacy ratios both at bank and group level.

Major IT system upgrades, either completed or in progress, will facilitate adherence to various Basel II reporting requirements. These include implementation of software to record incidents relating to operational risk, a credit origination system in use in Malawi since April 2014 and to be rolled out to other countries in 2015 and implementation of a data warehouse solution to enable automation of Basel II reporting.

The economies in which we operate all enjoyed significant growth in GDP ranging from 5% to 7.5% in 2014 but the financial sectors of these economies faced numerous challenges. A common theme was domestic currency weakness for a variety of reasons including uncertainty surrounding political transition in Zambia and Mozambique, continuing fiscal deficits in Malawi and in Botswana the knock on effect of a depreciating South African Rand. Direct policy interventions which impacted on profitability included changes to liquidity reserve requirements in Zambia and Malawi and a moratorium on increases in fees and commissions in Botswana. Indirectly, we felt the impact of an aggressively contractionary monetary policy in Malawi and a less liquid banking sector in Botswana (following transfer of significant government department deposits from commercial banks to Bank of Botswana).

Despite the challenging environment, the group continues to enjoy strong balance sheet growth with total group assets increasing by over 25% to now exceed K100 billion. We remain relatively conservativein terms of management of our balance sheet and over 40% of our total assets are represented by lower risk cash equivalents and money market investments.

Significant financial resources have been invested in the many projects we have undertaken to position our group for future growth and this has had an unavoidable negative impact on our profitability. Although group operating income grew by a satisfactory 12% from K16 billion to K18 billion, expenditure has grown at a faster rate and our cost to income ratio has worsened from 44% to 56%. The overall outcome is a 10% drop in earnings per share from 261 tambala to 234 tambala.
Looking forward, the rate of economic growth in the region should remain robust albeit marginally below that achieved in 2014.
Our major concern is whether contraction in agricultural output in Malawi as a result of the severe floods experienced in the country will be sufficiently mitigated by the positive impact of donor funded, post disaster reconstruction projects. Monetary policy in Malawi is likely to remain contractionary as inflationary pressures persist due to continuing fiscal deficits and the push effect of increased food prices following a poor harvest.

Prudent banking practice, let alone increased banking sector regulation, requires that we remain conservative in the deployment of the funds at the disposal of the group. We, therefore, anticipate sustainable rather than spectacular growth in operating revenues. We are however, optimistic that we have absorbed the initial cost burden of transforming our recent acquisitions in Mozambique and Zambia and expect these operations to begin to make an increasing contribution to group results. This, together with technology enhancements in Malawi, should lead to an increase in overall group efficiency and a return to historic cost to income ratios.

In conclusion, I wish to thank the central banks of all the countries in which we operate for their guidance and support, the directors of all group companies for their invaluable advice, management and staff for their dedication and commitment and last, but most importantly, our shareholders and customers for their continued confidence and trust in the FMB group.

Rasik C. Kantaria
Chairman
June 2015

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