Industry headwinds halve Stanchart�s profits
Brian Benza | Tuesday August 18, 2015 18:00
In its financials published yesterday, the country’s oldest bank said profit after tax fell 61 percent to P66.2 million, with the high cost of sourcing deposits effecting a big dent on operating income.
Despite the bank’s interest income rising eight percent to P440 million, tight competition for deposits saw interest expenses almost double to P198 million, leading to a significant decline in net interest income.
In the period, operating income decreased by P100 million to P445 million as fee income was also affected by the tough trading conditions.
The bank, however, managed to continue to grow its balance sheet with loans to customers increasing by nine percent to P7.8 billion, and customer deposits rising by 21 percent to P11.5 billion.
“Total income is down 18 percent despite sustained growth in customer assets and liabilities due to higher cost of funding. Operating expenses increased by nine percent as the bank continues to invest in technology and infrastructure support.
“Balance sheet strength has been a management priority during the challenging market conditions, which intensified in the second half of 2014 and persisted into 2015, causing a substantial erosion of margins and compromising revenue growth.
As interest rates continued to be depressed and competition for deposits heightened, business performance came under pressure,” stated the bank in statement accompanying the financials.
There is an ongoing extensive hunt for deposits in the commercial banking industry, as banks have run out of loanable funds due to a prolonged period of over-extended lending without a commensurate growth in deposits.
With interest rates at a three-decade low, the liquidity crunch has pushed up the cost of funds for the banks as deposits rates have risen, squeezing banks’ profit margins in the process. In a bid to boost its lending book, Stanchart Botswana shareholders recently approved a request by the bank to borrow P389 million from its UK based parent company. At industry level, the Bank of Botswana (BoB) made an effort to ease the tight liquidity conditions in April this year by releasing P2.3 billion into the market, through halving of the Primary Reserve Requirements (PRR) to five percent.
The liquidity challenges faced by banks are part of sweeping changes in the sector that was previously characterised by excess liquidity, super normal profits and low deposits rates.
Prior to the announcement of the results, Standard Chartered had warned its shareholders of the expected decline in financial performance.
The country’s two other listed banks, FNBB and Barclays, have also released similar profit warnings to their respective shareholders.
Looking forward, Stanchart says that it expects to soon start realising the benefits of a reorganisation of the retail clients segment undertaken to better align the business’ structure with opportunities in the market.
“It is expected that performance will improve as the strategy is refined and increasing focus is placed on improving service delivery.
“The corporate clients segment continues to focus on leveraging our strong solutions capabilities to deliver value.
There is increasing appetite for our technology based cash management solutions, which offer enhanced features that deliver more convenience and flexibility for clients. The trade business continues to tailor solutions, which allow clients to manage their businesses better,” stated the bank.