Adjusting to the new normal
Brian Benza | Friday April 10, 2015 12:48
BusinessWeek: How did you manage to turnaround the bank’s fortunes in 2014?
van der Merwe: It was a combination of both teamwork and implementation of a strategy that was anchored around digitalisation, improving transactional volumes and customer service. But the staff pulled it all together; it was more of having the right people in the right places.
BusinessWeek: There is a significant jump in non-interest income in 2014. What drove this growth?
van der Merwe: Because of the prevailing low interest rates environment, there was a focus to boost non-interest income. This was achieved by increased transactional volumes as we engaged deeper with both our retail and corporate customers. The insurance business also contributed while some of our new products such as Cashsend performed well in the year.
We are providing assistance to Botswana outbound clients who are expanding into the region outside Botswana borders. Most of the transactions will be dollar based. We have segmented our business into 3 key pillars; which are Corporate and Investment Banking, Business Banking and Enterprise Banking to allow us to deepen relationships and increase our outreach to clients across the country. In Corporate and Investment Banking, our key focus is Mining and Public Sector, whilst Business Banking focuses on agriculture, small and medium enterprises.
BusinessWeek: Your focus is to regain your position as the country’s top bank. Any specific targets and dates?
van der Merwe: We have made three commitments to Barclays Africa and the local market. The target in Africa is for Botswana to be in the top three banks in the country and solidify the first spot in Botswana.
We are currently in second position in Botswana from a revenue perspective. The second commitment was to have a return on equity of between 18 and 20 percent. We are already sitting at 23 percent. So when we look at the local market, we have revised that to 25 percent. We have also made a commitment to have a cost to income ratio in the low 50’s. We are currently sitting at 55 percent because of investment in our business, so the focus will now be on growing income.
BusinessWeek: Any strategy to boost interest income, particularly secured lending?
van der Merwe: We are now more inclined towards secured lending although we are also on a guarded approach to improve unsecured lending despite the tight liquidity and low interest rates margins.
On the retail side, unsecured lending still dominates at 73 percent but when you factor in Corporate and Business Banking, secured lending is at 43 percent.
BusinessWeek: Talking of tight liquidity, what is the liquidity condition of the bank?
van der Merwe: Barclays is in a healthy liquidity position. Our loan to deposit ratio is at 90 percent, but we have capacity to raise loanable funds in the form of the Medium Term Notes (MTN) we floated last year as well as deposits from the group. My team started rebalancing the capital and liquidity positions in 2013 when they realised that loans were growing at a much faster rate than deposits. We have weathered the storm very well.
BusinessWeek: How is the situation in the industry now after the central bank’s intervention?
van der Merwe: Things have normalised. Immediately on April 1, we started to see wholesale deposits rates coming down. We have already experienced a reduction in wholesale deposits rates from over 10 percent in some cases to below prime rate in response to the cut in the Primary Reserve Ratio (PRR). It was a decisive move and very positive action from the Bank of Botswana.
BusinessWeek: But even before the intervention, would you say the banking industry was in a crisis?
van der Merwe: No. I would not say the industry was in a crisis. I think the banks found themselves in a situation they had not experienced before. In just two years, the sector moved from excess liquidity to tight liquidity and some of the industry players were caught off-guard. I believe there was a period where banks were slow to adjust to the changes. This has now normalised.
BusinessWeek: Do you think the P2.3 billion released is enough to cover the liquidity gap?
van der Merwe: Well it is difficult to say, but we have already seen deposit rates coming down, so it has been effective.
Deposit rates have come down to around or just under prime rate. So the situation is now normal as banks can now profitably source funds to lend out. But, the most important thing is for the industry to now be a bit more careful in terms of lending. I believe the market will positively adjust to the new developments.
BusinessWeek: The central bank has come out to blame the banks for the liquidity problems. Would you say that is a fair comment?
van der Merwe: I think there was a period where banks were aggressively growing their customer base and may have ended up lending to undeserving clients.
On the other hand, some banks might have taken on deposits that were a bit too pricey, particularly the wholesale ones. For Barclays, we have a very conservative approach and the key is to lend responsibly.
BusinessWeek: Another school of thought is that banks are just competing for the same deposits in the market and there is a need for new money to be injected into the economy and the banking industry. What is your take?
van der Merwe: I would really like to see more investment coming into Botswana. I think there is still a huge opportunity and the economy is in a much better position than some other African countries. I know all my clients are complaining about the prevailing economic situation here but I think there is still huge potential in this economy. It has been going so well in Botswana that sometimes any slight tightening might be mistaken for a train smash.
What would help is to make the process of investment easier so that we stimulate growth and job creation.
BusinessWeek: Can you think of any other sources of new deposits for banks? There have been calls for pensions funds invested abroad to be brought back home?
van der Merwe: The banking industry can support that by coming up with more sophisticated products for the pension funds to invest in locally. I think we should look at why that money has been sent abroad in the first place.
I am against using legislation to bring back the pension fund monies because what you will get is just compliance and not the willingness that is required. Barclays is working on a number of products that should be exciting in that space.
BusinessWeek: There is a view that Botswana banks have the highest profitability ratios in Africa. Do you share the same views?
van der Merwe: I think Botswana is a high profit country. Botswana is a low risk environment with high political stability and high credit ratings. So it is not just the banks alone, but also all the businesses that operate here and in the region that are making high profits.
So to single out the banks might not be fair. I think the consumer should decide because if my products and services are expensive, the consumer will shop around for better products and services.
I do not think we should regulate profitability as this could chase away investors. The market will balance itself out.