Commercial banks will be challenged to increase their product offering and be more innovative this year as the tough economic conditions loom large over their profits, BG Correspondent Keikantse Lesemela reports.
The slow economic growth has led to higher impairments; revenue has been restricted by a moratorium on fees and lower interest rates. In their forecast for the financial year 2016, commercial banks have announced that they are expecting low performance in 2016.
Last year Bank of Botswana (BoB) reported that the banking sector is transitioning from a period of historically high levels of excess liquidity and high interest rates. The sector was characterised by rapid growth in bank balance sheets and high profits against the backdrop of high interest margins.
“The situation has now changed to that of significant reduction in excess liquidity in a low interest rate environment and a more competitive market. This transition towards a normal banking environment is a welcome development as it is expected to spur banks into being more innovative and enhancing risk management systems in the process,” reads the report from BoB.
Banks are therefore expected to adopt more prudent and effective liquidity and economic capital management policies and practices. The banking sector profitability was subdued in 2014 with after-tax profits amounting to P1.5 billion down from P1.8 billion recorded in 2013.
BoB imposed a two-year freeze on upward adjustment of bank charges and fees in January 2014 in a bid to foster effectiveness of banking services. This was in response to growing public concern about the high levels of bank charges and fees that were considered out of sync with the quality of banking services and products
The bank rate was reduced from 6.5 percent at the beginning of the year to six percent in August last year. Presenting the 2016/17 budget speech the minister of Finance and Development Planning, Kenneth Matambo said the reduction was consistent with the inflationary outlook and was expected to reduce the cost of borrowing for investment in the country.
“To support growth an accommodative monetary policy stance was maintained during 2015, with the bank rate being reduced from 6.5 percent at the beginning of the year to 6.0 percent in August 2015,” said Matambo.
Over the 12months to December 2015, annual inflation rate fell from 3.8 percent. This was driven by the decrease in fuel prices, which were adjusted downwards in February, August and December 2015 following a decrease in crude oil prices worldwide.
Matambo said it is anticipated that this trend will continue, thus exerting downward pressure on domestic prices with inflation remaining within the Bank of Botswana’s objective range of 3-6 percent. According to Kwabena Antwi, Afena Capital, Investment Analyst, tough economic conditions are expected to persist in the mid-term and banks are expected to adapt to the environment.
“Slowing economic growth has led to higher impairments; revenue has been restricted by a moratorium on fees and lower interest rates.These factors are expected to persist in the medium-term which means that the banking industry will have to adapt to the environment,” he said.
He said the banks would have to innovate and increase their product offering to customers in order for them to operate in the current environment. “The health of the economy affects potential banking customers. When there are economic uncertainties, consumers restrict or delay their purchases which reduces the demand for banking products such as personal loans and mortgages,” said Antwi.
He explained to BG Business that profitability in the banking sector will improve when banks adapt to the current environment and provide innovative products geared towards consumer needs and when the moratorium on fees is lifted and the interest rate rise.
First National Bank
First National Bank Botswana (FNBB) directors announced in a statement published in Botswana Stock Exchange (BSE) that they are expecting their performance to be lower than last year. The bank which has a market capitalisation of P9, 7 billion, made a profit of P343, 3 million for the interim period ending December 2014.
This represented a 5 percent fall in profits when compared to the same period in 2013. Like most commercial banks in the country, the bank has been hit by liquidity crisis, lower lending rate regime and slow growth in deposits from customers.
A moratorium placed by the central bank on upward adjustments of non-interested linked products and services has also affected banks’ profit margins.
Barclays bank recorded 30 percent decline in profits to P110 million in their half-year ended 30 June 2015. Business banking and corporate banking mainly drove the profits.
Presenting the results last year, the bank’s Managing Director, Reinette Ven Der Merwe said the performance was satisfactory considering the tough economic environment. Interest expenses increased by 35 percent from P94 million in 2014 to P126 million in 2015.
Loans and advances to customers increased by nine percent to P8.4 billion year-on-year with retail loans growing by 10 percent on the back of the bank’s secured lending and term loans and corporate loans increasing by three percent to P1.8 billion driven mainly by term loans.
In its financial results for the year ended 31 December 2014, Standard Chartered bank Chief Executive, Moatlhodi Lekaukau said the challenging trading conditions have caused a rapid decline in margins.
Moatlhodi explained that liquidity has been a challenge to the commercial banks as most banks struggled with growth.
Other banks have previously announced their discontent regarding the liquidity challenge and the low interest rate, which was reduced by the central bank by 1 percentage point from 7.5 percent to 6.5 percent. However, despite the low interest rate and liquidity, Standard Chartered balance sheet continues to grow, having strengthened by P2.7 billion during the past year.
Despite the economic conditions the bank’s balance sheet remains strong with loans to customers increased by 29 percent to P8.1 billion while deposits grew by 27 percent to P10 billion and impairment was well managed, decreasing by 94 percent year on year.