The prevailing low interest rate regime, weaker household incomes and a flagging economy combined to pull First National Bank of Botswana (FNBB) profit after tax down 15 percent to P290 million in the six-month period to December 2015.
Despite a six percent growth of the loan book in the period, FNBB’s interest income took a two percent knock, as the cost of sourcing new funds remained high reflected by a 20 percent rise in interest expenses.
“Given the pressures on the economy, the bank continued to be prudent in its lending, but still achieved growth in advances of six percent on the prior year. This growth emanated mainly from group schemes, where deductions are from source, and from both home loans and WesBank where each loan is secured by the asset. “Despite the difficult economic conditions, and assisted by both priority focus on collection strategies and selective lending practices, growth in impairments was confined to 10 percent. “Non-interest income increased by 11 percent, reflecting the bank’s success in increasing transactional volumes through cross selling to its customer base, and by increasing the numbers of Automated Teller Machines (ATMs), Advance Deposit Taking Machines (ADTs) and clients using Online Banking,” said CEO, Steven Bogatsu.
Despite interest rates reaching a three-decade low in 2015, the bank’s credit growth slumped to a 10-year low as tight liquidity coupled with poor credit worthiness of households on one hand and tighter credit extension by banks on the other, slowed advances.
According to data availed by the Bank of Botswana (BoB), annual credit growth fell by nearly half from 14 percent in October 2014 to eight percent in October 2015, with the decline almost entirely concentrated on corporate borrowing. Credit growth rate was last below eight percent in 2005 when it reached 7.2 percent in December of that year.
The slower credit growth comes on
The apex bank also released an extra P2.3 billion last year to ameliorate tight liquidity in the banking system through cutting of the primary reserve requirement.
While FNBB anticipates the central bank to cut interest rates by a further 50 basis points due to the benign inflation environment, the bank still expects credit expansion to remain subdued in 2016.
“The benign inflation outlook, positive current account and relatively high real interest rate differentials with trading partners suggest that the interest rate may be subject to a further reduction, although we expect this to represent the bottom of the cycle. Despite very low nominal interest rates, it is noted that a number of structural factors are limiting credit growth, which is expected to slow below seven percent in 2016 in response to continued normalisation of property values and increased caution in credit supply policies,” said Bogatsu.
Looking into 2016, Bogatsu said the bank will continue to be cautious in extending credit and optimising recoveries, with a view to enhancing the quality of overall lending.
Notwithstanding the challenging economic conditions, FNBB said the fundamentals of their strategy remain sound.
With interest expenses having declined from a 43 percent growth rate in June 2015 to 20 percent while impairments growth rate sharply also declined from 64 percent to 10 percent in the same period, Bogatsu said the tide looks to be turning for the bank.