Banking sector shows signs of stress
Economists have expressed a worrying trend in the banking sector coupled with liquidity within the sector, arrears in bank loans which impact on the supply of loanable funds and credit risk. Dr Keith Jefferis and Sethunya Sejoe of Econsult firm expressed with concern in their 2017 second quarter review that there are increasing signs of stress in the banking system, on a number of fronts.
First to note is that banking liquidity has been falling steadily for some time, but the decline has been particularly sharp since the beginning of 2017. Excess liquidity fell to 2.6 percent of banking assets in April, the lowest since the “liquidity crisis” of late 2014. “The liquidity squeeze has been driven by stagnant deposits –there has been no growth in the deposit base of banks for at least two years.
With little surplus liquidity, it is not surprising that bank lending has slowed – the banks (or some of them at least) are simply running out of loanable funds. “At the same time the level of bank loans in arrears has jumped sharply, to 8.3 percent - up from 6.4 percent a year earlier. Contrary to some perceptions that it is household borrowers that are debt stressed, the most striking increase in arrears has been on lending to businesses and – for the first time – on lending to parastatals.”
According to the duo, the combination of these developments – lack of supply of loanable funds and concerns about credit risk – combined with much reduced borrowing by parastatals, have led to a sharp slowdown in annual bank credit growth, which is now at its lowest rate for 20 years. Perhaps in a further reflection of the lack of credit-worthiness of many parastatals, Government’s own direct lending has increased sharply.
On the other hand, another firm, Motswedi Securities analysts Garry Juma and Moemedi Mosele have observed that the sector is transforming and the primary objective of banks as intermediaries between savers and borrowers is no longer the key driver of profitability, with complementary services and fees taking a leading role. Under the current interest rate regime, the two said margins remain under pressure with banks forced to improve efficiencies and cost management to remain afloat.
“We expect impairments to remain above 2 percent for the second quarter, as BCL and its employees continue to impact on the sector. Furthermore, the South African Reserve Bank recently cut rates by 25 basis points, in the wake of a technical recession, placing the local economy under pressure and giving the Bank of Botswana room for a further cut before the end of the year, thereby squeezing bank margins,” shared the analysts. Meanwhile, Barclays momentum has slowed following a sterling performance in Q1, up by 13.1 percent, to close Q2 2017, up by a modest 3.5 percent, at P5.90 per share.
FNBB’s performance was flat for the quarter, dipping by 0.7 percent, while Stanchart saw a massive 14.1 percent price slip, the biggest move of the quarter. As for Stanchart, the analysts do not believe that the bank is out of the waters just yet, although activity on the counter is slowly improving, with volumes showing participation by institutional investors and not only desperate to sell retail investors.
They said, “It might be too soon to say the company has turned a corner, but the last financials (Dec 2016), showed an improvement on profits before tax of over 50 percent, enough to raise interest on the counter.” Last Friday the board of Standchart Botswana announced that the company’s results for the period ended 30th June 2017 will be significantly lower than those achieved in the corresponding period in the prior year.