Banking sectors sails unchartered waters
Isaac Pinielo | Friday December 19, 2014 09:03
At the end of the first half of 2014, asset quality remained stable and within normal range, while earnings and interest income were stable but non-interest income margins were constrained.
In the same year, major banks continued to experience constrained profits throught the year with Barclays Bank of Botswana’s Profit After Tax (PAT), leading the pack as its profits tumbled for the third reporting period in a row.
The bank also reported that its profit after tax fell by 35 percent to P123 million in the six months to June 2014.
Before 2010, the banking sector had been characterised by excess liquidity, super normal profits and low deposits rates, making savings unattractive. But in the last three years, a mixture of regulatory changes, macroeconomic development and a mismatch between deposits and credit growth saw the banking sector experience an unprecedented structural shift.
Bank of Botswana figures show that excess liquidity, which refers to excess cash that banks hold above regulatory requirements, had dropped sharply from 2006 when excess liquid assets made up 45 percent of bank assets to just six percent by the end of 2013.
Due to monetary policy interventions, the amount of Bank of Botswana certificates (BoBCs) issuance has dropped dramatically from the peak of P17.5 billion in 2008 to P5.5 billion at the end of 2013.
As a result, the central bank’s annual interest expense has fallen from P2.13 billion to P369 million over the same period. On the other hand, banks’ profitability has dropped sharply, with the post tax return on equity falling from 55 percent in 2006 to 25 percent in 2013. Adding to the sector change is an emerging shortage of deposits with some banks almost fully lent resulting in the loan to deposit ratio rising from 47 percent in 2007 to 82 percent percent in 2013.
Officials acknowledge that the commercial bank lending trajectory that was observed in 2013 continued into the third quarter of 2014, demonstrating strong commercial bank optimism against the backdrop of subdued deposit growth.
Chief executive officer of the Botswana Bankers Association, Oabile Mabusa, pointed out that imposition of the two-year moratorium on an increase in bank charges, commissions and other non-interest fees by the Bank of Botswana (BoB) has had a dampening effect on bank revenues.
“Its (moratorium) full impact on the industry gross income and profitability will become apparent when the consolidated 2014 industry balance sheet is released,” he said.
He noted that at a basic level, these are regulatory parameters which can be best assessed against statutory provisions, confirming that the banking sector has maintained adequate levels of capital and liquid assets throughout the year to date.
“But while liquid asset ratios have remained adequate against statutory requirements, there has been a notable declining trend in absolute levels of commercial bank liquidity,” he said.
Mabusa further indicated that this has further been compounded by the characteristically large volatile component of the deposit base and the fact that banks have almost exhausted their lending capacities.