First National Bank Botswana [FNBB]has successfully grown its balance sheet by 14 percent, despite operating in an economy which was expected to grow by no more than 1 percent in 2015.
In the Bank’s financial results for the year ended 31st December 2015 released last week, this growth was led by an increase in customer deposits of 13 percent. This was as a result of the bank embarking on a successful deposit raising strategy following the tight liquidity constraints that the banking sector experienced in the first half of 2015.
To lengthen the liability tenure of the bank, a senior debt funding programme was launched and P238 million was successfully raised, bringing total borrowings to P642 million. In an environment of low market credit growth, the excess liquidity was placed in investment securities. This positioned the bank well for productive credit growth opportunities.
Given the pressures on the economy, the bank continued to be prudent in its lending, but still achieved growth in advances of 6 percent In the previous 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.
The bank’s management remains confident that the bank will continue as a substantial player and to be a leader in innovation, solution provision and service excellence in the market. Despite the tough trading environment, in the year ahead, FNBB Chief Executive Officer Steven Bogatsu has indicated that his bank will continue to focus on tightly managing liquidity and risk while driving transactional volumes and launching innovative solutions.
Bogatsu who took over from Lorato Ntakhwana in 2015, noted: “In order to maintain our momentum in these endeavours we will concentrate on a number of specific strategic focus areas. Botswana growth is still promising, although under threat. We expect mild recovery of economic growth in 2016, led by services sector growth and some recovery in the mining sector.”
Key local factors impacting the Botswana economy
The banking sector has been experiencing challenging trading environment, amongst them; falling interest rates in a low inflation environment, which have had a negative impact on net interest margins, and credit extension is slowing despite the rate cuts.
FNBB has also experienced increased competition due to new entrants, which impacted on its market share. The implementation of the Basel ll regulations has impacted on the liquidity, capital and dividend policy that the bank pursued.
Other key local factors impacting on the Botswana economy are salary hikes and drought-relief measures which have led to increased government expenditure and a looming marginal deficit; as well as friction between the operational and infrastructure budget, resulting in project backlogs and increased maintenance costs.
The lack of critical inputs of water and electricity negates prospective growth and is producing a downslide in human development indicators. The need for fiscal consolidation post the global economic crisis has led to reduced government spending and government debt (bond issuances and borrowings) remains low despite the legal capacity to borrow more and the highest credit rating in Sub-Saharan Africa.
The overall impact on Botswana of a weak demand for diamonds and high rough prices will be seen in declining mineral revenues, and De Beers is expected to continue to respond to market conditions by cutting production. Sightholders continue to experience increasing challenges in accessing finance.
Rough diamond exports remain relatively high as cutting and polishing companies favour India due to high productivity and lower labour costs. Lower copper prices continue to affect local mining operations and Botswana’s coal prospects are declining in the face of reducing prices and the high capital cost of coal exploration.
“We have entered a new banking era in Botswana characterised by heightened competition, increased regulation and a low interest rate environment. The moratorium on fee rate increases continues to impact on fees and commissions for banks and to put pressure on our non-interest income.
Increased cost to align the Bank’s systems and reporting requirements to comply with new regulations such as the National Credit Act will further erode interest margins,” Bogatsu commented.
The bank’s forecast
FNBB expects increased competition from new entrants, particularly non-bank financial service providers, whose offering competes directly with some of its e-channel solutions, and this will challenge its ability to maintain its market share.
Both businesses and households are under pressure in the prevailing tough economic conditions, increasing impairments and non-performing loans, and banks are enforcing tighter credit requirements. Furthermore, Bogatsu indicates that the stringent requirements around the impending implementation of the Basel III regulations will have a further negative effect on liquidity and intermediation, as well as on capital, and therefore, on dividends.
“Basel III demands that enhanced standards on minimum capital and liquidity requirements, supervisory review processes, risk management, capital planning, risk disclosure and market discipline be put in place; and this will be achieved at considerable expense,” he said. However, it’s not all doom and gloom. “The economic outlook remains cautiously optimistic, and there are sufficient indicators that Botswana will weather the current crop of challenges,” he said.
Commenting on the results, Tlotlo Ramalepa, Analyst at Motswedi Securities, said the results reflected the ragged operational environment which is characterised by, mainly low interest rates, increased competition, liquidity constraints, as highlighted by squeeze in net interest margins, increased interest expense and ultimately decline in profitability of 15 percent year-to-year.
“However, despite the challenging environment, the bank managed to grow its non-interest income line by 11 percent mainly from increased transactions of ATMs, Point of Sales (POS), online & mobile banking, and slim lines among others, which I believe is key at a phase where interest incomes are under pressure for the industry. Also the 13 percent growth in deposits (mainly from the RMB division) will succour their liquidity needs for the bank going forward,” he commented.
Considering the recent sluggish economic growth indicators and stability in prices, Ramalepa said they expect the central bank to maintain its accommodative monetary easing to stimulate growth within the economy.
“Thus banks’ margins could continue to be under pressure during the year 2016 and potentially straining profitability. Also the reduced appetite for saving due to low interest rates could lead to heightened interest expenses as banks might attempt to grow their deposits to fund their loan books. Therefore we are likely to see subdued performance for the banks during the year,” he observed.
FNBB, which listed on the Botswana Stock Exchange in 1993, is the largest company on the BSE by capitalisation at P10 billion as at June 2015. The Bank has the largest balance sheet and the largest advances book of all banks in Botswana at P21 billion and over P14 billion respectively.
FNBB has, in its 24 years of operation, become the most profitable Bank in Botswana with the most diversified balance sheet structured to achieve sustainable profits in all economic conditions.