Banks profitability plunging
Brian Benza | Friday September 5, 2014 13:46
While most banks profitability was largely lukewarm in the year, a 29 percent drop in profit before tax at Barclays pulled down the whole industry’s profitability ratios in the year According to the Bank of Botswana Annual Banking Supervision report released last week, key profitability indicators maintained the downward trajectory as lower interest rates and reduced Bank of Botswana Certificates (BoBCs) impacted on profitability.
While in absolute terms after tax profits for all commercial banks remained unchanged at P1.77 billion, profitability ratios tumbled with the Return on Equity (ROE) decreasing from 31.9 percent to 27.4 percent. Return on average total assets (ROAA) fell from 3.2 percent to three percent. “The growth in banking industry profitability was subdued in 2013.
“Although pre tax profit increased by 2.9 percent, there was an increase in operating costs, which contributed to the deceleration in the growth rates of profits. One major bank registered a 29 percent decline in profitability in 2013 contributing significantly to the subdued banking industry profitability,” read the report.
In the 2012, the banks’ ROE declined to 31.4 percent from 35.2 percent in 2011 while ROAA marginally declined from 3.3 percent in 2011 to 3.2 percent.
The industry’s waning fortunes stem primarily from the Bank of Botswana cut in interest rate coupled with the shift in open market operation policies, which resulted in a drastic cut in the banks traditional cash cow, the BoBCs. In the past five years, the central bank has cut the benchmark bank rate from 15.5 percent to the current 9.5 percent compressing the banks margins on advances.
On the other hand, the central bank’s 2011 move to limit the amount of the risk free BoBCs and also slash their attracting interest rates has also dented the banks profitability. For years, banks heavily relied on the BoBcs as a strong driver of interest income, leading to strong criticism against the central bank for enriching the already super rich banks through the issuance of the high yielding instruments.
In July 2011, the BoB increased commercial banks’ primary reserve ratios and also capped Bank of Botswana Certificates (BoBCs) at P10 billion, as part of measures to restrain runaway interest costs.
The various measures have seen the central bank interest expenses, which was being paid to the commercial banks as interest on BoBCs, declining from a high of P2.1 billion in 2008 to a mere P368 million last year.
Due to high household indebtedness coupled with stagnation of disposal personal incomes most banks have also adopted a risk averse approach preferring to concentrate more on secured lending.
However, the Bank of Botswana says that despite the three year downward spiral of profitability, the ratios main strong and above international norms for banks of comparable size. Profitability for the banks in 2014 is expected to further come under pressure as credit growth has slowed down while fee income will be impacted by the central banks’ moratorium on bank charges.
A significant spike in interest rates is also unlikely in the horizon as inflation is seen to remain within favourable a range in the medium term.
Despite the 200 basis points reduction in the bank rate during the period between May 2013 and May 2014 total credit extended by commercial banks slowed down from previous years, growing by only 11.7 percent year on year in May 2014 compared to its peak of 32 percent a few years ago. The fall was driven by softening of household credit, a new phenomenon in a market where growth has historically been driven by the household sector.
Deterioration has also been noted on commercial bank arrears, with total arrears as a proportion of outstanding bank credit growing from 4.5 percent as at the end of fourth quarter of 2013 to 5.2 percent at the end of March 2014. The increase is attributed to a higher increase in arrears on credit to firms, while arrears on households credit declined.
Addressing the media in Gaborone last week, FNBB CEO Lorato Boakgomo-Ntakhwana said that the strategic focus on growing loans and advances in the secured lending portfolios whilst adopting a conservative credit risk appetite produced rewards.
FNBB impairments in the year ended June 30, 2014 grew by only two percent and impairments to gross advances as well as non-performing loans to gross advances remain at below industry norms.
Reflecting the effects of interest rate cuts, the FNBB recorded a modest three percent rise in interest income despite the strong growth in advances of 17 percent coupled with a reduction in Bank of Botswana Certificates of 46 percent.
However in the year to June 2014, FNBB, which is the largest bank in the country, recorded a lukewarm growth in profit after tax of three percent. Barclays which recorded a 29 percent drop in profit in 2013 is yet to release its 2014 interims, although the bank has already warned shareholders through a cautionary statement that the results are going to be more than 10 percent lower than the previous corresponding period.
Standard Chartered, the third largest bank in the country, had a surprising sparkling first half in 2014 recoded a 24 percent rise in profit after tax on the back of strong retain growth as well we corporate deals.