Oromia Bank entered its 2023/24 financial year with cautious optimism but delivered a mixed performance as moderate asset growth and deposit gains were tempered by a steep decline in profitability. The Bank’s leadership, led by Teferi Mekonnen, attributed much of the strain on the balance sheet to fast-paced branch expansion and human capital investments. These steps, intended to extend the Bank’s footprint across urban and remote areas, led to higher costs that pressed down on margins and overall earnings.

Incorporated in 2008 with a paid-up capital of 91 million Br raised from around 5,000 shareholders, Oromia Bank emerged as a third-generation financial institution and quickly earned a reputation for pushing the envelope in rural banking. Over the past decade and a half, the Bank has scaled up to a paid-up capital of 6.5 billion Br, posting a 21pc increase year-on-year. The expansion helped raise the Bank’s capital-to-asset ratio by nearly one percentage point to 14.07pc, demonstrating stronger capital buffers even as asset growth softened.

Nonetheless, management’s aggressive push to open branches was based on assumptions that were no longer aligned with market realities, where digital banking is becoming a mainstay rather than a niche offering.

President of the Bank, Teferi, recalled how a similar expansion strategy 15 years ago stirred a seismic shift in the financial sector. The number of bank branches nationwide soared from 634 to nearly 15,000, fueled mainly by banks seeking to capture underserved rural populations. While that approach helped mainstream finance for many Ethiopians, Teferi believes the environment has changed. According to him, digital banking’s rapid uptake has made brick-and-mortar expansion less appealing, even though the Bank’s board of directors remained keen on preserving Oromia Bank’s founding mission of bringing banking services to remote areas.

Board Chairperson Assefa Seme, a medical doctor by training, defended the Bank’s expansionary policy. He believes opening branches spreads deposit concentration risks by diversifying the customer base.

"If deposits come from various regions, the Bank is less reliant on a handful of large depositors," he told shareholders.

However, the Bank’s moderate deposit growth revealed that new branches did not scale to the extent executives had envisioned. Even with a broader reach, the Bank's deposit per branch fell from 107.91 million Br to 98.12 million Br. Nonetheless, Assefa stood firm on the idea that a wider reach can insulate the Bank from regional economic shocks, especially in a country where the rural population remains underbanked.

For the President, the Board of Directors is “the boss,” pushing for an aggressive branch rollout despite his reservations. The result was a sharp increase in operational expenses and personnel costs, in particular, ballooned 35pc to 8.5 billion Br. Wages, benefits, and administrative overhead took up over half of the Bank’s total expenses, up from 53pc the previous year. Personnel costs alone jumped from 2.33 billion Br to 3.16 billion Br, a rise that Teferi said had a direct impact on net profit—some of the new outlets generated low returns and drained resources.

“It was a wrong strategy,” he conceded. “Inefficient and unproductive branches were opened.”

Although Oromia Bank’s senior executives tried to moderate the pace of expansion, branch openings continued, bringing a five percent increase in permanent staff and a 13pc bump in temporary employees. Still, Teferi insisted that the motivation behind these branches was a desire to honour the Bank’s founding ideals. Across the banking industry, by contrast, employee growth was 2.9pc, while industry-wide income grew 18.4pc. Oromia Bank found itself with a swelling headcount and decelerating income growth, a combination that whittled away its productivity levels.

Profit per employee halved to 129,290 Br, down from 254,000 Br the previous year, signalling an urgent need to boost efficiency and revenue per staff member.

Internal performance metrics at the branch level have varied. At one of Oromia Bank’s oldest branches, the Abinet Branch, managed by eight-year veteran employee Tiwlidework Tulu, the past year was one of “hiccups,” owing to an uncertain environment that slowed business for distributor and trader clients operating in rural areas. While her branch performed relatively better, Tiwlidework said the key to achieving better performance is expanding the customer base among retail clients, savings and credit cooperatives, and local unions.

"Tapping into these segments can offset weaknesses in larger commercial lending, which has been overshadowed by risk assessments in a slowing economy," she said.

The Bank’s overall revenue grew by 15pc to 9.5 billion Br, but surging costs overshadowed this uptick. Net income dropped 46.7pc to 840.9 million Br, yielding a considerable decline in Earnings per Share (EPS) to 14.2pc, less than half the industry average. According to Oromia Bank’s executives, while interest income climbed to 7.19 billion Br, marking a solid 21pc expansion, it was not enough to counteract the rising tide of personnel and operational expenses. Interest expenses, meanwhile, nearly reached three billion Birr, up from 2.3 billion Br, further straining profitability.

For Teferi, the Bank’s immediate emphasis is on curtailing costs and recalibrating operational structures. He plans to downgrade or merge poorly performing branches, suspend new openings, and freeze further hiring. Although this may feel like a shift away from Oromia Bank’s longstanding strategy, Teferi believes it is a necessary measure to stem losses and stabilise the bottom line. He hopes that closing unproductive branches and curbing overhead costs will restore confidence.

“We’ll refine and reshape ourselves,” he said, disclosing cost cuts and productivity enhancements as top priorities for the coming year.

Digital transformation has become a game changer in the Bank’s recalibration plan. The rollout of the OrooDigital app attracted 2.9 million users, boosting the Bank’s digital customer base by 47pc. The Bank is also investing in a Tier III data centre and robust disaster recovery facilities, with Teferi framing these investments as "indispensable for modern banking services." He disclosed the Bank’s goal of channelling more transactions through mobile and online platforms, reducing the need for physical branches and saving overhead costs in the long run.

Analysts say this pivot is long overdue.