The country’s commercial banks saw a 10% slip in collective profits last year to P1.25 billion, as the sector was weighed down by higher defaults and operating expenses.
The banks’ fortunes were dampened last October when the Bank of Botswana (BoB) cut interest rates by 0.5%.
According to the central bank figures released on Wednesday, a 3.4% increase in banks’ net interest income to P4 billion, was outweighed by an 18% jump in bad debt provisions and a seven percent leap in operating expenses.
Banks’ operating expenses rose to P3.9 billion from P3.6 billion, eating into profits.
Bad debt provisions, in particular, averaged P83 million per month, up from P70 million in 2016, a trend associated with constrained incomes within households.
According to the central bank, national wages increased by 2.9% in the nine months to September 2017, which was not enough to stimulate aggregate demand in the economy.
By December, households were holding 61% of the P54.2 billion owed by all sectors to commercial banks, while their arrears were 51% of banks’ total arrears of P5.5 billion.
The ratio of non-performing loans to total loans for households decreased marginally to 4.5% in December 2017, while rising for businesses to 6.4%.
The BoB said the situation was
“There was sufficient provisioning by banks to cover non-performing loans, with banks remaining profitable. Moreover, the capital, asset quality, liquidity and profitability levels that meet prudential requirements for banks indicate a generally sound and stable financial system,” the BoB said in its 2018 Monetary Policy Statement released on Tuesday.
Worryingly for analysts, 67.1% of household credit by December 2017 was classified as unsecured lending, one of the riskiest asset classes for banks.
Although annual growth in unsecured lending rose from 8.3% in 2016 to 8.8% in 2017, the BoB said there was no reason for concern.
“The risk to financial stability on account of this credit composition is moderated by the extent to which unsecured credit is diversified being relatively small amounts spread across many borrowers of differing risk profiles.
“Furthermore, the bulk of the household credit is to salaried individuals, which enables proper credit evaluation using ascertained income as the basis for determining repayment capacity.
“In addition, credit risk is lowered where loans are protected by credit life insurance.”