Banks profitability tumbles
Brian Benza | Tuesday September 8, 2015 18:00
According to a 2014 Banking Supervision Annual Report released on Monday, the banking sector’s after-tax profit decreased by a significant 16.7 percent to P1.5 billion last year due to a low interest rates environment coupled with a high rise in non-performing loans.
This contrasted with a positive growth rate of 0.1 percent in 2013, with last year’s softer profits signalling a distress period for an industry operating under an environment characterised by tight liquidity, charges freeze and a flagging economy.
“The prevailing low interest rate environment in the country coupled with a 31.2 percent increase in the total provisions charge for loan impairments to P760 million in December 2014 compared to P579.4 million in 2013, contributed to the decline in profits,” the central bank report stated.
In a bid to boost a flagging economy, the central bank has cut interest rates by a cumulative two-percentage point since December 2013.
The profitability of banks, as measured by Return on Equity (ROE) and Return on Average Total Assets (ROAA), experienced a downward trend, partly due to a 16.7 percent decline in net profit after tax.
ROE, which is a measure of the efficient use of shareholders’ funds, decreased from 27.4 percent in 2013 to 19.1 percent in 2014.
Total past due loans, which indicate loans tainted by arrears, increased significantly by 52.9 percent to P3.2 billion in December 2014 while non-performing loans also grew significantly by 12.1 percent to P1.6 billion as at December 31, 2014.
The rise in the non-performing loans negatively impacted on the profitability of the banking sector, as banks had to provide for these impaired loans and advances, and thus contributed to the decrease in the banking sector’s overall net profit after tax, said the central bank.
The Botswana banking sector was severely affected by a liquidity shortage from the second half of 2014, due to a prolonged period of credit extension without a corresponding rise in deposits.
This liquidity dearth forced the central bank to halve primary reserve requirement in April this year.
In 2014, the banking sector gross loans and advances increased by 14.2 percent to P45.1 billion, while total industry deposits increased at a slower rate of six percent.
Consequently, the financial intermediation ratio, which indicates the ratio of deposits that have been converted to loans, reached a high of 87.6 percent in December 2014. “The intermediation ratio remained above the 50 to 80 percent range recommended for banks operating in Botswana and precipitated short-term liquidity pressures in the market,” added the report.
Since December 2010, deposits have grown by a much slower rate of 37 percent to P53 billion against a credit growth of 104 percent to P45.2 billion.
As a result of the tight liquidity, the annual growth in commercial bank credit went down in the first half of 2015, from 13.5 percent in December 2014 to 7.4 percent in June 2015.
This was despite an expansionary monetary policy in the period, which saw interest rates cut and an extra P2.3 billion in liquidity being injected into the banking system.
In the six-month period to June 2015, credit growth by businesses took the hardest knock with year-on-year growth in lending to the business sector decreased from 17.2 percent in December 2014 to 4.2 percent in June 2015.
The trend of declining profits is likely to extend into 2015 with two large banks having announced softer profits in the current reporting season.
In its half-year financials published recently, Standard Chartered Bank said its profit after tax fell by 61 percent to P66.2 million, while FNB Botswana’s after tax profits were down 18 percent to P591 million in the year ended June 2015. Aggregate economic activity is also expected to dampen this year with finance ministry officials now forecasting a 2.67 percent growth rate in 2015 from the original 4.9 percent.