The Bank of Abyssinia’s (BoA) financial results for the fiscal year 2023/24 tell a story of growth mixed with rising costs and narrowing returns. However, a particularly notable development came from its foreign exchange activities.

Net foreign exchange income turned positive at 99.19 million Br, compared with a loss of 223.56 million Br the previous year. Based in London, financial statement analyst Abdulmenan Mohammed (PhD) called the turnaround “remarkable,” a bright spot in an otherwise cautious market.

Yet, beneath the positive development in the forex front, Abdulmenan noted what should be a concerning trend. Earnings per share (EPS) have declined for two consecutive years, at 33pc last year, dropping by five percentage points from the previous year, still at par with the industry average.

Provision for loan and asset impairments rose by 7.3pc to 1.03 billion Br, a substantial sum that signals the Bank’s need to scrutinise credit management. The current 0.66pc level of provisions aligns roughly with the industry’s long-term average of around 0.5pc, a sign that BoA’s risk management stood on relatively stable ground. Still, observers say the environment could shift quickly, and prudent provisioning today may not fully insulate the Bank in the future.

According to Abraham Gebeyehu, Abyssinia Bank's chief retail banking officer, the Bank is moving to diversify its revenue streams and manage costs through more judicious resource use. The approach prioritises high-yielding product portfolios that can offset rising expenses and regulatory restrictions.

Total assets expanded by 17.3pc to 222.3 billion Br, which places the Bank squarely within an industry-wide pattern of private lenders enjoying double-digit asset growth. Management and analysts say this expansion is no small feat in a market defined by uncertainty and tightening regulatory curbs. However, the Bank’s profit profile is beginning to show signs of stress beneath the surface.

Net profit after tax rose by 9.3pc to 4.24 billion Br, less than that of a peer like Dashen Bank, at 4.88 billion Br. Though the profit gain is not insignificant in an environment shaped by inflation and foreign exchange crunch, it signals a broader truth about Abyssinia Bank and its first-generation peers. Size and expansion alone do not guarantee a firm foothold in the evolving financial sector.

As industry averages once neared a 2.6pc return on assets, BoA’s 1.91pc figure showed the erosion of profitability at a time when growth strategies no longer translate seamlessly into robust returns. Bekalu Zeleke, president of Abyssinia Bank, attributed this trend to the Bank's "exceptional growth in assets" over the past five years.

"One of our biggest challenges is that capital growth is not matching assets expansion," he told Fortune.

Analysts see as a sign that BoA is good at in using its capital to optimise efficiency, but the President acknowledged the inherent risk during times of volatility.

Executives in the private banking sector have grown accustomed to years of steady asset build-ups and surging profits. Over the decade beginning in 2013, the private banking industry enjoyed healthy expansion and a manageable set of non-performing loans (NPL), even amid periodic regulatory changes. Abyssinia Bank’s current performance demonstrates that it is a mature institution that has capitalised on this long growth trajectory but now stands at a critical turning point.

Bekalu and his senior executives have built a formidable resource base, yet the escalating cost of operations and narrowing profit margins reveal the fragility of that achievement. They appear to have learned that more moderate margins are the price of doing business in a market faced with cost pressures and structural inefficiencies.

A closer look at BoA’s expense structure shows wage, benefits, and administrative costs prominently placed. These costs represent over half of total expenses, a reminder that operations remain resource-intensive. The wider private banking market’s wage and administrative expenses are usually around five percent of assets.

According to the analyst, BoA’s executives could do more to squeeze efficiencies out of its structure, whether by rethinking resource allocations, tightening controls, or embracing technology to curb costs.

Where BoA sets itself apart is the intensity of its core lending operations.

Revenue gains have come from both financial and nonfinancial intermediation. Income climbed by 22pc to 27.7 billion Br, a jump stemmed mainly from a 17.4pc rise in interest on loans, advances, and central bank bills, which reached 24.6 billion Br. Service charges and commissions soared by nearly 48pc to 2.1 billion Br, while other income shot up almost 67pc to 946.8 million Br.

Its loan-to-asset ratio was 75.46pc, and its loan-to-deposit ratio was 87.13pc, both strong indicators of aggressive lending. In more placid times, such assertiveness could enhance margins. But when liquidity buffers and foreign currency availability are as precarious as they are now, pushing the lending envelope can increase vulnerability.

BoA’s capital-to-asset ratio (6.39pc) was well below the 10-year private bank average of 13.5pc. With an asset-to-equity ratio of 9.59, the Bank appears to have a leaner capital structure that could amplify sensitivity to sudden shifts in the business environment.

Net interest income accounted for roughly 59.74pc of total income, somewhat below the historical industry norm of around 65pc to 73pc. This shortfall may show strategic diversification. According to the analyst, should interest margins tighten further, a well-balanced income stream could serve as a cushion.

According to Bekalu, Abyssinia Bank will focus on beefing up forex earnings in the coming years. This is one strategy to diversify revenue streams, along with customer acquisitions.