The Sunday Mail
THE country’s banking sector has morphed into a much stable industry, especially after the collapse of five banks – Capital Bank (former Renaissance Bank), Interfin, Genesis, Royal Bank and Trust Bank – that were allegedly affected by deep-seated corporate governance deficiencies.
The Zimbabwe Banking Sector report recently released by stockbrokers IH Securities notes that the “bad apples” in the industry were negatively affecting both confidence and profitability.
As a result, the renewed sector is now expected to enter a new phase of both stability and consolidation within the next 12 months, experts believe.
Without many industry players, the Reserve Bank of Zimbabwe (RBZ) will be able to effectively carry out its supervisory role.
“The closure of some banks is clearing the sector of financial institutions with the weakest corporate governance, least robust risk management systems and insufficient size to manage risks.
“A lower risk sector should, therefore, emerge in the short to medium term,” said the research note.
However, the stockbrokers warned that rising non-performing loans and existing liquidity challenges still posed significant risks for the sector.
For a long time the banking sector has been plagued by low confidence, poor corporate governance and high operating costs.
The central bank, whose role is to superintend the financial services sector, has also been failing to carry out its lender-of-last-resort function due to failure by Government to inject capital into the apex bank.
This has forced banks to maintain higher than necessary levels of non-interest earning cash “to create a sufficient buffer in case of mismatches.”
However, this should ease going forward.
IH Securities estimates that 40 percent “of the NPLs recorded by the sector are currently held by banks that have not been reporting financials, either under curatorship or in the process of liquidation.”
But banks are now lending only to “the highest quality clients” to cut risk.
“We, therefore, expect that while the impairment charges will be significant over the next 12 months, the sector will be holding less risky assets on balance sheets beyond that point,” said IH Securities.
Financial black holes of US$39 million at Capital Bank, more than US$2,5 million at Trust and over US$11,4 million at Royal Bank forced the country’s banking sector regulator to withdraw operating licences for the three firms, leading to their closure in the past three years.
In 2012, RBZ’s investigations revealed that Interfin had a negative capital position of US$105 million.
The bank was subsequently placed under the “recuperative” care of a curator.
Genesis, whose licence was revoked in 2012, has more than US$1,4 million deposits under lock and key.
Cumulatively, more than 8 496 corporate and individual depositors were affected.
Bad corporate governance was mostly to blame for the failures.
Non-performing loans (NPL), which have climbed from 4 percent at the end of 2012 to 16 percent by close of last year, are creating new risks for the financial services sector.
The four banks surveyed by IH Securities for the report – CBZ, FBC, NMB and Barclays – have an average 10,8 percent in loans that are not paid, marginally higher than regional averages.
Impairment charges knocked off 12 percent of income for Zimbabwe’s banks at the end of 2013.
In the worst case scenario, which assumes the NPL to rise to 20 percent in the full-year 2014 for CBZ, FBC, NMB and Barclays, the report predicts the industry will still remain profitable and stable.
Bad debt provisions are forecast to increase to US$135 million but operating income before impairments will neither decline nor rise, holding steady at US$216 million, the same as the previous year.
After tax profit will be little changed at a combined US$60 million.
“This would suggest that the core of the banking sector, once we ignore the banks that are already under curatorship or in the process of liquidating, is unlikely to register capital losses in 2014,” explains the report.
Efforts by Government to amend the Banking Act to restrict individual and institutional shareholdings in banking institutions are also expected to strengthen the industry going forward.
Government has tabled plans to limit individual equity holding in a bank to just 5 percent and 25 percent for institutional investors to curb bad corporate governance practices, which precipitated the 2003-2004 banking sector crisis.
Individuals owning huge chunks of banks tended to disproportionately influence the disbursement of funds and risk taking by the banks.
“Given the significant role that individual owners have so far played in a number of bank failures, we expect the new Act to contribute positively to increasing sector stability,” IH Securities said.
Early this year, Government and the Africa Export and Import Bank (Afreximbank) availed a US$100 million facility aimed at reviving the interbank market to ease liquidity challenges that have been prevailing since dollarisation.
The interbank market has not been functional since 2009 when Zimbabwe adopted the multi-currency system.
