When the hunted becomes the hunter
Brian Benza | Friday May 8, 2015 15:04
With the industry facing shortages of loanable funds due to a prolonged period of over-extended lending without commensurate growth in deposits, banks have embarked on a deposit rummage offering unusually high returns for savers.
Sitting on over P10 billion in excess liquidity just two years ago, banks did not need to make any effort to attract deposits and offered menial interest rates to those that held any extra cash for savings.
So liquid were the banks that not only did they offer miniature returns but cash deposits also attracted high handling charges, all this contributing to a low savings culture among Batswana.
High account maintenance costs added to other transactions charges and contributed to the indifferent savings culture as any interest accrued on savings accounts was often eroded by the exorbitant fees
Fast forward to 2015 and the tables have turned, with excess dropping by 80 percent. Banks are now forced to aggressively pursue the once unimportant depositor offering lucrative interest rates even to small time savers.
A snap survey of the banks’ deposits rates shows that the liquidity crunch has pushed up the cost of funds for the banks as deposits rates have raised, a development that will further squeeze profit margins in the prevailing low lending rates environment.
Although it registered the highest deposit growth rate among local commercial banks in 2014, Standard Chartered bank is leading the scramble for savers offering an unprecedented “Cool 8” percent return on a fixed one-year deposit of a minimum of P20, 000.
Other banks, including Barclays and First National Bank (FNB) have also revised their deposits rates upwards.
In the past six months, deposit rates for smaller depositors of a minimum P1,000 have slightly gone up from an average of about 3.75 percent to 4.10 percent for six months fixed deposits. For 12-month fixed deposits, rates have gone up from 3.15 percent to 4.85 while two-year deposits have gone up from 4.5 percent to five percent.
However, bigger institutions holding larger deposits for longer periods of time are able to negotiate higher deposit rates which have gone up to as much as eight percent for a 3-month period.
At the height of the liquidity shortages, banks were paying as much 11 percent for larger deposits of up to P100 million for a 3-month period, before the central bank intervened by halving the primary reserve requirements and thus releasing about P2, 3 billion of loanable funds to banks.
“Deposits rate have been gradually going up as banks now have to compete for funds due to the liquidity tightening. But while the costs of attracting funds for the banks is going up, they can’t increase the rate at which they lend out the funds as it is regulated due to its link to the declining bank rate. The low interest rates regime has also forced some institutions with larger pools of funds to look beyond Botswana for higher returns,” said a banking industry executive.
While the higher returns now offered by the banks will go some way in attracting deposits, analysts also say the low disposal incomes coupled with high unemployment will throw spanners in the banks’ works as there is just not enough new sources of deposits in the economy.
“On the larger scope, government needs to start spending again so that the economy starts to tick up. We are beginning to see an erosion of the depositor base and with liquid parastatals such as BURS, which used to be the banks’ cash cow, now banking directly at the Bank of Botswana, it is difficult to imagine any new sources of deposits unless we can bring back off shore funds,” said another banking executive, who declined to be named. In tracing the roots of the deposit shortages, Bank of Botswana figures show that since December 2010, deposits have grown by a much slower rate of 37 percent to P53 billion while credit has grown by 104 percent to P45.2 billion.
This resulted in a sharp increase in the intermediation ratio, which is simply a ratio of bank loans to deposits from 53.1 percent at the end of 2010 to 87.6 percent in a four-year period to the end of 2014.
Announcing its results for the full year ended December 2014, Botswana’s largest bank by assets, First National Bank of Botswana (FNBB) said liquidity conditions in the market remained tight in the market, with the loan-to-deposit ratio (excluding foreign currency) reported at 97 percent in October 2014.
“This presents a challenge for financial institutions to participate in growth opportunities in the country,” said FNBB. Barclays Bank Botswana last Friday said its Loan to Deposit Ratio (LDR) had increased to 90 percent and it would, if necessary, look to tap into its capital base and bond market to shore up liquidity.
The Bank of Botswana recommends that banks maintain an LDR of between 60 and 80 percent.
Due to the lack of a corresponding growth in deposits, the industry’s LDR has risen from 47 percent in 2007 to 88 percent in 2014, leaving some banks fully lent and unable to provide fresh lending.
Reflecting the drying up of liquidity in the market is the steep fall in the excess funds invested by the banks in the central bank, with outstanding Bank of Botswana Certificates (BoBCs) falling from P17.5 billion in 2008 to P4.2 billion at the end of 2014.
According to central bank governor Linah Mohohlo, externalisation of funds by institutional investors as well as government’s initiative to rationalise disbursements of funds to parastatals and local authorities, has also contributed to the decreases in excess liquidity in the market. Last year alone, the Botswana Public Officers Pension Fund is reported to have liquidated investments close to P2 billion in local bonds and invested the funds into the South African bond market, contributing to the liquidity woes in the banking industry.
Analysts say measures to boost liquidity include encouraging deposits from non-residents, or stimulating the transfer of resident deposits from foreign currency accounts – which account for around 15% of total deposits - to Pula accounts.
While all the transformations have come as a form of shock change to industry players, analysts concur that the change reflects the dawning of a new normal in the sector where the depositor now has a louder say and the central bank’s role has turned from absorber to provider of liquidity.