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COVID-19 puts brakes on banks’ superprofits

MBONGENI MGUNI
Bottom line: Banks are tightening their credit assessments while borrowers have lower appetites for loan uptake PIC: KENNEDY RAMOKONE
The country’s local banks face a rare period of dampened returns due to the coronavirus (COVID-19), breaking the decade-long run of superprofits in which the sector has raked in more than P15.5 billion in cumulative net earnings.

For banks, the coronavirus crisis means higher loan defaults by clients and lower deposits as businesses dig into their reserves. The Bank of Botswana’s (BoB) reduction of the bank rate will also hit banks’ major profit line of loan interest income, while depressed economic conditions for clients will hit the other income line of fees and charges on transactions and services.

After a decade of healthy returns, including an all-time record of P2 billion in net incomes for 2018, local bank investors face an uncertain future particularly as South Africa, where the parent groups of four of Botswana’s largest banks are based, is reportedly pressuring banks there to cut dividends and executive bonuses for this year.

The BoB has given banks a range of measures to support them and their clients, including lower primary reserve requirements, lower capital adequacy ratios, cheaper access to overnight funding and others.

At least P1.6 billion in additional liquidity will be made available in the banking sector from the lower primary reserve requirements alone, while the eased capital adequacy frees up banks to lend more and absorb greater impairments.

However, analysts say lower profits in the sector this year will be driven by supply and demand issues, as banks on one end are tightening their credit risk assessments in a crisis-hit year, while their customers’ ability and desire to borrow has been dampened by the broader economic impact. “As banks we make money from the interests on the loans that we give our customers and when the BoB says the interest rates must go down, our income also goes down,” Bankers Association of Botswana chair, Keabetswe Pheko-Moshagane told a recent media briefing.

“The 25% discount on charges that we have given our clients will also drop our non-interest income by that much.

“When the sectors that contribute a lot to our economy go down, these are our large corporate customers and our profits also go down.”

She added: “Do we expect that we may not survive this? That’s a possibility, but we are still at an early stage. Right now we have enough capital and liquidity to support the economy and customers until year end.”

Local banks have provided repayment holidays and discounts on transaction fees, as a way of helping

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their customers through the coronavirus crisis. Stanbic Bank Botswana CEO, Sam Minta said shareholders would be hard hit from the impact on banks’ profitability this year.

“From the impact on an earnings point of view, there’s a significant impact,” he said at the same briefing.

“This is not just about muted business, but across the world the monetary policies that are being made are impacting us.

“The impact is quite severe, but we are well capitalised and have the liquidity to continue in business. “Our shareholders will take a bit of a hit but they are happy that we will do what we have to for our communities.”

First National Bank Botswana CEO, Steven Bogatsu said banks expected a downturn in the growth of both loan uptake and credit extension. “We are also going to be impacted from an impairment perspective where we expect to see arrears from industries that have been affected by what’s going with COVID-19.

“The positive thing is that we do, however, expect that we will see a higher uptake of digital platforms, as a result of the social distancing protocols.” While all the listed banks, which are also the country’s largest, declared healthy profits recently, it is expected that dividends and returns for the September reporting season will show a different picture. The BoB, meanwhile, has said it is not prepared to force banks to revise their dividend and executive bonus policies at this point, preferring, rather, to let them use their discretion to manage their books.

Responding to BusinessWeek enquiries in a recent briefing, BoB governor, Moses Pelaelo said the central bank as a regulator did not want to be seen as managing banks, but rather would deal with behaviour that could endanger safe and sound practices.

“At this stage we have no cause to interfere in matters that are really the competence of management of banks and we would not want to interfere in their dividend policies and others,” he said.

“However, we do control that through the capital adequacy regime and if a bank pays excessive dividends, it would erode its retained earnings.

“Its ability to grow its balance sheet would be constrained to the extent that the dividend policy takes away resources from the bank.”



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