Six of the seven companies listed on the Ethiopian Securities Exchange are banks, so learning to read a bank covers most of the market. The same framework can be used across them, but it cannot tell you which bank to buy. Nothing here is investment advice.
Why banks need their own tools
A bank takes deposits, lends much of that money and keeps the difference after costs and losses. Because its balance sheet consists largely of other people's money, a small increase in bad loans can have a large effect on profit.
Ordinary company measures such as gross margin and inventory turnover are not useful for a bank. Instead, focus on interest earned, problem loans, shareholder capital and the cost of running branches and systems.
How a bank makes money
Net interest income. The bank earns interest on loans and on the government and other securities it holds, and pays interest on deposits. The difference is its largest source of income.
Fees and commissions. Account charges, payments, trade finance, guarantees, card and mobile-banking services, and money-transfer commissions.
Foreign-exchange income. Banks earn from buying and selling foreign currency. In Ethiopia this can be a meaningful part of earnings and it depends heavily on exchange-rate policy, so check how large it is and how it has moved.
Interest-free banking. Several banks run interest-free windows or subsidiaries. Income there comes from profit-sharing and financing arrangements rather than interest, so look at how the bank reports it and whether the numbers are shown separately.
Ratios to use
Use these ratios to compare a bank with its own results over several years and with other Ethiopian banks. Comparisons with a telecom company, or with a foreign bank operating under different rules, are not meaningful.
Net interest margin. Net interest income divided by average earning assets. It shows how profitable lending is. A margin that is falling while the loan book grows deserves an explanation.
Cost-to-income ratio. Operating costs divided by total operating income. Lower means more of each birr of income reaches profit. Check whether a low ratio comes from efficiency or from under-investment, and whether a rising ratio comes from expansion that is still maturing.
Non-performing loan ratio. Loans that are not being repaid as agreed, divided by total loans. This is the most important single number for judging a bank's risk. Always look at the trend and at the definition the bank uses.
Provision coverage. The money set aside against bad loans, divided by the non-performing loans. A thin cushion means that future losses would come straight out of profit.
Capital adequacy ratio. The bank's regulatory capital divided by its risk-weighted assets. It shows how much loss the bank can absorb before depositors are at risk. See the next section for what the regulator now requires.
Return on equity and return on assets. Profit divided by average shareholder equity, and by average total assets. These show how well the bank uses the money invested in it. Very high figures can reflect a good year as much as a good franchise, so look at several years.
Loan-to-deposit ratio. Loans divided by deposits. A low figure can mean cautious lending or a lack of lending opportunities. A very high one can mean the bank depends on borrowed funds.
Per-share figures. Earnings per share, dividend per share and book value per share. These connect the bank's results to what one share represents. Check the number of shares in issue, because capital increases and new issues change the per-share numbers even when the business has not changed.
The rules that shape Ethiopian banks
National Bank of Ethiopia (NBE) directives determine what banks must hold, what they may lend and how they report. Four recent developments affect how investors should read their results. Since the rules change, check the directives linked at the end of this article.
Tighter loan classification and provisioning. In June 2024 the NBE issued five revised directives. One of them covers asset classification and provisioning and aligns the determination of non-performing loans and provisions with IFRS. Under it, non-performing loans are placed on non-accrual status, so interest that is not collected stops counting as income. If one loan to a borrower is non-performing and makes up a defined share of the bank's exposure to that borrower, the borrower's other loans are reclassified too. Limits on how many times a loan may be restructured are meant to stop troubled loans being disguised. The practical effect is that reported non-performing loan ratios in recent years may look higher than they would have under older rules, and comparisons across years need care.
Limits on concentration and related parties. Another of the June 2024 directives caps a bank's total exposure to one borrower or connected group at a share of its capital, and sets separate limits on lending to related parties. When you read an annual report, look for the large-exposure and related-party notes.
A new capital framework. In November 2025 the NBE introduced risk-based capital adequacy requirements for banks. Press reporting describes minimum ratios higher than the previous 8 percent, with a total capital requirement of 11 percent of risk-weighted assets, and a compliance deadline at the end of 2026. This is a Basel II and III style framework, which also adds charges for market and operational risk. Banks therefore have to report in more detail, and a bank that looks well capitalized under the old measure may look less comfortable under the new one.
A higher minimum capital for banks, and consolidation. The NBE set a minimum paid-up capital of 5 billion birr for commercial banks, with a deadline of 30 June 2026. The regulator has also signalled that it favours consolidation: it has noted that a large state-owned bank holds roughly half of banking assets, while many smaller banks share a small portion of the market. For shareholders this can mean capital raising, mergers, or changes in ownership. Check each bank's latest disclosure for how it stands against the requirement.
The NBE has also issued a directive on how foreign banks may enter the market. Competition could change margins over time, so it is worth following.
What the sector looked like in the latest NBE report
The NBE's third Financial Stability Report, covering July 2024 to June 2025 and reported in the press, gives a view of the banking system as a whole.
| Measure | Reported figure |
|---|---|
| Commercial banks covered | 31 |
| Net profit after tax | About 93.4 billion birr |
| Return on assets | 2.5 percent |
| Return on equity | 27.4 percent |
| Average non-performing loan ratio | 3.1 percent |
| Provisions to non-performing loans | 80 percent (104.1 percent a year earlier) |
| Share of banking assets held by the largest state-owned bank | About 49.1 percent |
A worked example with invented numbers
This example is hypothetical. "Example Bank" does not exist and none of these numbers describes a real company. Amounts are in millions of birr unless stated.
These figures say little on their own. A valuation ratio becomes useful only when read alongside the bank's trend, loan quality, capital position and the price of other banks.
A checklist for one bank
Before forming a view of any bank, work through these questions using its latest audited annual report.
- Is profit growing, and is the growth coming from lending, fees or foreign exchange? A profit increase from a one-off item is worth less than one from steady income.
- What is the non-performing loan trend over at least three years, and how does the bank define it? Compare with the NBE's rules and with other banks.
- Are provisions rising at least as fast as bad loans?
- How does regulatory capital compare with the current minimum? Is the bank planning to raise capital, and what would that do to existing shareholders?
- How concentrated is the loan book by borrower and by sector? Read the large-exposure and related-party notes.
- How much of income comes from foreign exchange, and how would a change in policy affect it?
- Is the dividend covered by profit? Does the bank retain enough to grow within the capital rules?
- Does the auditor's opinion contain any qualification or emphasis of matter?
- What do the notes say about contingent liabilities, litigation and regulatory actions?
- How many shares are in issue, and has that number changed? Are there plans for new shares?
Where to find the numbers
Start with the prospectus and the latest audited annual report published by the bank and filed through the ESX. The auditor's opinion and the notes on loans, provisions, capital and related parties usually contain more useful detail than the summary pages. Our guide on how to read a listed-company disclosure explains how to work through these documents. The company profiles for Wegagen Bank, Gadaa Bank, Awash Bank, Abay Bank, Bank of Abyssinia and Sidama Bank link to each issuer's materials and ESX page.
Check dates carefully. Ethiopian banks report for a fiscal year that ends in the middle of the calendar year, and results may arrive months after the year-end. Always note which period a figure covers before you compare banks.
Common mistakes
- Comparing share prices instead of valuations. A 500 birr share is not more expensive than a 100 birr share without knowing how many shares exist and what each earns.
- Ignoring non-performing loans because profit is high. A strong year can hide a weak loan book.
- Reading a high dividend yield as safety. It can reflect a falling price or an unsustainable payout.
- Judging liquidity by the last price. On a young market with few trades, the last price can be days old and may not be a price at which you could sell. Our article on liquidity risk explains this.
- Assuming rules will stay still. Capital, provisioning and ownership rules have all changed recently. A conclusion that was sound under last year's rules may not hold.
- Treating the sector average as a target. Use averages for context and the bank's own history for judgement.