Banks profitability sink to new lows
Brian Benza | Friday June 3, 2016 18:00
According to the Bank of Botswana 2015 Annual Report released this week, profitability among the banks as measured by Return on Equity (RoE) as well as Return on Assets (RoA) declined with one smaller bank recording a loss in the year.
Although the report showed profitability by individual banks, the central bank says the maximum RoE registered by banks fell to 21.4% from 27% in 2014 while the bank that had the lowest profitability registered a negative (6.2 percent) RoE in 2015.
“Profitability among the banks has been declined over the years due to a variety of reasons. Apart from National Development Bank, there was another smaller private bank that registered a loss in 2015.
We take it a normalisation of the situation as banks in Botswana were making astronomical profits before.
“But the banking system is still sound and stable despite the challenges,” deputy governor, Andrew Motsomi said.
As measured by RoA, statistics from the central bank show that the bank that was most profitable recorded maximum of 2.6 percent while the least profitable recorded a negative RoA of (0.4) percent.
The dwindling profitability came as its core business, lending, fell to a decade low of seven percent largely due to slower credit uptake by businesses.
In the year, annual growth in commercial bank credit eased from 13.5% in 2014 to 7.1 percent in 2015 due to a decline in growth of lending to the business sector from 17.2% to a negative (0.3) percent. In contrast, growth in household credit increased from 10.7% to 12.8% in the same period.
On the other hand, banks have become very cautious in making new loans, due to concerns about the volatility of the deposit base and the ability of customers to repay.
Despite the absence of figures of profitability by unlisted smaller banks, analysts fear that the four largest banks make almost all of the profit in the industry, meaning that some of the medium-sized and small banks were probably making losses.
“There is a danger that such a sharp fall in profitability could lead to instability in the banking system, which would have widespread costs,” said a commentary in an economic report from Econsult.
First National Bank of Botswana research manager, Moatlhodi Sebabole believes the slower growth in the banking sector reflects both declining fixed investments by businesses as well as eroded purchasing power of households, which makes credit qualification more stringent.
According to Sebabole, there is a possibility of a rebound in the banking sector this year in line with the recovery of the general economy.
“The growth of the sector is positively correlated to economic growth and as long as overall economy health remains fragile, the sector will continue to undergo some turbulence.
“This will therefore increase the need for banks to get more innovative in product offering, do more structuring and off-balance sheet activities so as to diversify their income streams on the non-interest income,” he said.