LOCAL BANKS HOLD FORT

09 Nov, 2014 - 06:11 0 Views
LOCAL BANKS HOLD FORT Job losses in the banking sector have not been worse than previously forecasted

The Sunday Mail

Depositors are moving from small banks to big banks

Depositors are moving from small banks to big banks

EXPERT analysis and stress tests measuring assets, deposits, profits, including loans and advances, continue to show that the local banking sector is holding its own, particularly in an environment where economic growth continues to plummet, with economists forecasting that growth this year might be below 1,5 percent – way below the growth estimates projected by both Government and the International Monetary Fund (IMF).

KEY HIGHLIGHTS

  • Growth forecasted below 1,5 percent

  • Total deposits at US$4,96 billion in H1

  • Five big banks holding 59,1 percent of deposits

  • LDR falls to 83,3 percent from 95,6 percent

  • Total banking sector assets at US$5,78 billion

  • IMF describes sector as weak

Zimbabwe currently has 13 commercial banks, three building societies and one savings bank.

Local brokerage firm MMC Capital Investment Research noted in its First Half Banking Sector Survey released last week that of the 17 local financial insitutions, 12 recorded profits while five reported losses.

Bank deposits continue soaring despite the obtaining tight liquidity conditions.

During the first six months of the year, deposits naturally climbed by 4,9 percent to US$4,96 billion from US$4,73 billion realised at the end of December last year.

But limited foreign direct investment (FDI) inflows and muted exports have had the effect of depriving the local market of long-term capital.

Local consumers have thus been exposed to expensive, short-term cash, which they have been finding difficult to repay.

There are fears that the persistence of high interest-bearing short-term loans might continue to push non-performing loans (NPLs), which are already above the 5 percent international benchmark, higher, while at the same time affecting local economic growth.

Worryingly, NPLs rose to 18,5 percent by June this year from the same period a year ago.

Banks are becoming increasingly wary and risk-averse, and there are already signs that they are now cutting back on lending, a development that might further stifle economic growth prospects as the appetite for working capital remains high in industry.

[Pic the dae

Zimbabwe Banking Sector Profitability

According to the latest statistics, though loans extended by financial institutions continue to be high, the loan to deposit ratio (LDR), which measures the portion of bank deposits that is loaned out to the market, retreated from 95,6 percent in December 2013 to end at 83,3 percent by June 30 2014.

From the reporting banks, the LDR also declined from 77 percent to 71 percent.

As hesitant banks cut lending, so, too, did profits slump.

As a result, total profit after tax for the reporting banks slowed to US$41,6 million at half year relative to US$52,1 million in the same period a year earlier.

Market watchers are concerned by the latest trends.

“Access to finance in sub-Saharan Africa is among the lowest in the world and presents one of the key obstacles to economic activity and growth. The issue of non- performing loans presents a further challenge for growth, especially in countries like Zimbabwe and Angola where the trajectory of non-performing loans continues to rise exponentially, thus dampening the region’s ability to achieve its full growth potential. . .

“The local economy is highly burdened by a plethora of impediments, which include tight liquidity; company closures due to low industrial capacity utilisation; rising formal unemployment and lowering disposable income; rising non-performing loans; and a disproportionate trade balance. Debt distress also continues to undermine the economy’s capacity to meet debt servicing obligations in light of a burdened national budget (with very little fiscal space) . . .

“The slowdown in GDP growth is also reflected in reduced revenue collections, depressed exports and imports. We opine that, the GDP growth rate will slow down to below 1,5 percent in 2014 as a result of these structural economic deficiencies,” explained MMC Capital in last week’s research note.

Analysts believe that consumers are now migrating from small banks to big financial institutions that are capable of providing them with security.

Statistics indicate that the Herfindahl-Hirschman Index (HHI), a measure of the market concentration of an industry’s largest firms that is traditionally used to determine if an industry is competitive or nearing monopoly, rose to 1 420 in the review period from 1 374 at the end of December last year.

Of the US$4,96 billion in deposits held by banks, 59,1 percent, compared to 56,2 percent last year, were concentrated in five big banks – CBZ, BancABC, Stanbic,CABS and Stanchart.

CBZ’s deposit market share alone rose from 25 percent last year to 31 percent by June 30.

Similarly, the same trend is noticeable in the distribution of assets in the sector.

CBZ accounts for US$1,55 billion of the total banking sector assets of US$5,78 billion as at June 30 2014.

Instructively, CBZ’s assets are 124 percent larger than the second biggest bank, CABS, whose balance sheet size is more than US$694 million.

It is believed that the architecture of the local banking sector is making it difficult for industry players to play their intermediary role in the economy.

Banking systems in most of sub Saharan Africa remain underdeveloped compared with other developing regions, but gradual financial deepening is underway in most countries. The small size of national markets, low income levels, and weak creditor rights and judicial enforcement mechanisms remain the major impediments to the industry. However, experts say the expansion of mobile phone-based banking and the spread of pan-African banking groups has the potential to significantly change the landscape for banking in much of sub Saharan Africa.

Adds MMC Capital: Globally, regulation and economic events will continue to drive a bigger wedge between weaker and stronger banks, with the latter group able to borrow more cheaply and attract more deposits. Global Banks continue to fine tune their business models in a bid to align their operations with the changing times. There has been some consolidation in the European market. . .

“Back home, the economic outlook remains fragile and uncertain as the national savings rate sustains a downward trajectory. Liability growth will likely remain a challenge as low incomes growth and weak investor confidence will continue to militate against deposit mobilisation from the unbanked population. In the face of the challenging economic conditions and increasing cost of doing business, the debt repayment capacity of borrowers remains constrained.

The ever rising level of non- performing loans continues to be an albatross around the banking sector’s neck, hence further dampening the risk appetite of banks. The increasing allocation of loans to individuals poses a further cause for concern as this crowds out the productive sectors of the economy. The consumptive nature of individual loans does not bode well for economic recovery. In order to foster positive economic recovery, more loans should be advanced to the productive sectors of the economy. This can however only be done if banks can access long term lines of credit which depends on the country’s credit rating.

The IMF said last week in an update on the country’s staff monitored programme that the country’s “banking system remains weak”.

Monetary authorities have however come up with a raft of measures to try and rehabilitate the financial services industry.

Already, a special purpose vehicle, the Zimbabwe Asset Management Company (Zamco) has been formed in order to buy toxic assets from local banks.

Efforts are also being made to recapitalise the Reserve Bank of Zimbabwe (RBZ), including reforms meant to attract long-term capital inflows that can be easily deployed to industry.

 

Share This:

Survey


We value your opinion! Take a moment to complete our survey

This will close in 20 seconds