Banks innovate to woo cheaper deposits
Brian Benza | Friday September 4, 2015 18:00
As the liquidity dearth heightened in the past year, commercial banks have found themselves paying astronomical interest rates to attract funds, a cost that is chomping into their profit figures. For the full year to June 2015, FNBB saw its interest expenses rise by 43 percent, largely due to high deposits rates paid to professional funders.
While the bank’s top line interest earnings registered a modest four percent rise to P1.29 billion, a mammoth 43 percent rise in interest expenses induced by the tight liquidity effected a P415 million dent on net interest income.
“The liquidity challenges experienced in the market called for all banks to increase the rates being paid on deposits in a bid to attract much needed funding.
“Deposits growth posted a 20% year on year increase leading to an interest expense increase of 43% which is reflective of the prevailing market conditions,” FNBB CEO Steven Bogatsu said. “Accordingly, the bank will continue on its drive to provide innovative products to attract less expensive funding sources, and to grow its non-interest income through both transaction volumes and diversification.”
In a bid to attract cheaper deposits, FNBB has launched flexi-fixed, a product which offers depositors ‘attractive’ rates but priced below the levels of professional funding.
The Flexi Fixed deposit account offers two investment term options being the 6-months and 12-months where the interest rate on any given day is directly linked to the prevailing prime rate. With a minimum opening balance of P100, the account does not attract any fees or charges and it only allows two withdrawals during the 6 month or 12 month term, subject to a maximum of 15% of the available balance.
In its half year financials published recently, Standard Chartered Bank said it also experienced a similar trend as profit after tax fell 61 percent to P66.2 million, with the high cost of sourcing deposits effecting a big dent on operating income.
Despite the bank’s interest income rising eight percent to P440 million, tight competition for deposits saw interest expenses almost double to P198 million, leading to a significant decline in net interest income. In its efforts to entice cheaper deposits, the country’s oldest bank is currently running a promotion in which depositors stand a chance to win phones.
In the promotion, the bank is offering customers who deposit a minimum of P5, 000 and above a chance to win the up-to-the-minute iPhone 6. Standard Chartered is also offering an unprecedented 8 percent return on a fixed one-year deposit of a minimum of P20, 000.
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, the tables have turned with excess liquidity dropping by 80 percent forcing banks to aggressively pursue the once unimportant depositor.
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 risen, a development that has further squeezed profit margins under the prevailing low lending rates environment.
At the height of the liquidity shortages, banks were paying as much as 11 percent for larger deposits of up to P100 million for a 3-month period, before the central bank intervened in April by halving the primary reserve requirements and thus releasing about P2,3 billion of loanable funds to banks.