Banking profitability bounces back

Brian Benza
Staff Writer | Friday August 10, 2012 00:00

According to the report, the banks' profitability as measured by Return on Equity (ROE) increased to 35.2 percent in 2011 after falling for three consecutive years. In 2008, ROE was at 58 percent before falling to 41 percent and 34 percent in 2009 and 2010 respectively. ROE is a ratio that measures the banks' after tax profits against shareholder funds.

'The profitability of the banks, solvency and total industry credit rose at a faster rate when compared to 2010. Similarly, the banking sector reported improvements in asset quality and consequently a decline in provision for bad debts,' said Bank of Botswana governor Linah Mohohlo in the report. In 2011 banks raked in P2 billion in pre-tax profits at a nine percent growth rate while after tax profits rose by 17.4 percent last year.The major contributor to the slow pace of growth in pre-tax profits was a 24 percent rise in operating costs during the year, largely due to staff costs and new technological products, such as mobile money.

While banks have shifted focus to non- interest income to boost their profitability due to the prevailing low interest rates regime, interest income continues to dominate the industry's earnings although at a decelerating rate. Like profitability, the banks' total income bounced back from a three-year slide to register a nine percent rise to P6.03 billion from P5.53 billion in 2010.'For the first time in three years the banking industry registered an increase in total income. The significant growth in income of banks was boosted by the 26.6 percent and 3.8 percent in non-interest income and interest income respectively,' reads the report.  The increase in non-interest income was mainly due to bank charges and related fees levied on customers against the backdrop of increased transaction volumes as well as the introduction of a diverse menu of new technological products.

In the past three years, commercial banks introduced a blend of new products particularly mobile money payment services, as an avenue of diversifying away from interest income, which has been hit hard by the stagnation of interest rates.After falling from as high as 15.5 percent in 2008, the Bank of Botswana has kept the benchmark bank rate steady at 9.5 percent since December 2010. According to the report, non-interest income has trended upwards in the past five years while interest income has shown a mixed growth trajectory. Non-interest income for the sector has risen from P800 million in 2007 to P1.6 billion in 2011 while interest income rose slightly last year to P4.4 billion after falling since 2008.

Total advances by the banks rose to P28 billion in 2011 from P21 billion in 2010 with households holding the largest share of the loans at 53 percent, a reduction from 63 percent in 2010.A report released recently by the IMF shows that the local banking sector is expected to ride out the crisis, which is slowly gripping European banks and their respective financial sectors, despite the fact that British banks manage more than 30 percent of deposits in Botswana.In its sub-Saharan outlook report, the IMF notes that Botswana is among four African states, including South Africa, Zambia and Mauritius where British institutions held more than 30 percent of deposits.In Botswana, these are Barclays and Standard Chartered, which by 31 December 2011 held P17.2 billion in deposits and was owed another P10.2 billion in outstanding loans by customers. The level of loans owed to Barclays and Standard Chartered by December 2011 was equivalent to 37 percent of total loans outstanding to all banks in Botswana.