THE average loan-to-deposit ratio for Zimbabwe’s banks rose to 93,4 percent in January this year, from 91,6 percent in December 2012, indicating how financial institutions had positively responded to the dire liquidity crisis on the market.
By June 30 2013, the banking sector’s loan to deposit ratio rose to 95 percent. The top five banks with respect to loans extended to the private sector were CBZ (US$823,6 million), BancABC (US$377,5m), Stanbic (US$297,8m), CABS (US$-296,8m) and Standard Chartered (US$203,3m).
Analysts fear however, that the high loan-to-deposit ration in the sector presented significant risks to the financial system in the event of major defaults.
Some sectors increased capacity utilisation between January and May before banks slowed down on lending towards the July 31 elections.
Post elections, banks slowed down on lending after adopting a cautious lending approach due to the high levels of non-performing loans and an uncertain economic environment as the new cabinet is yet to define its economic road map.
Many banks are currently conservative and failing to meet the loan appetite from the public and private sector. The lending is estimated to have declined to below 55 percent.
As a result of the high perceived risk which has been magnified by political uncertainty, capital inflows into the country are mismatched with the demand for long term credit in the economy.
Questions are being asked if banks would be able to lend to the public sector to revive the economy.
Banks and some listed companies have reported their financial results for the half year to June 30. Most banks’ profitability during the interim period grew at a slower pace and in some instances declined as the effects of the Memorandum of Understanding (MoU) between banks and the Reserve Bank of Zimbabwe took effect.
This has cast doubt on their ability to support the revival of the private sector.
The MoU took effect on February 1, 2013 when the central bank directed banks to significantly lower bank charges or completely eliminate them in some instances for individual deposits which the banks relied on for income generation.
According to AfrAsia Kingdom, the local operating environment remains challenging for banks and has compromised the prospect of sustainable long-term growth, if the recently released financials are anything to go by.
The underlying risks posed by the operating environment include volatile deposits, absence of an active inter-bank market, lack of an effective lender of last resort, market illiquidity, cash-based transactions and limited access to external credit lines.
AfrAsia Kingdom said the total net profitability of 16 financial institutions which have published their financials so far decreased by 0,63percent from US$55,23 million in June 2012 to US$54,88 million in June 2013.
“CABS was the most profitable bank at US$10,6 million, followed by Stanbic (US$8,05m), CBZ (US$8,01m), Standard Chartered (US$7,2m), ABC (US$6,84m), FBC (US$3,08m) and NMB (US$2,67m) while MBCA posted US$2,1million,” said AfrAsia.
Banks’ reliance on non-funded income declined slightly as net interest/total income increased to 48 percent, from 47 percent. Ideally, the main income stream for banks should be net interest which should be able to cover operational costs.
CBZ and CABS are the only institutions with significant net interest income contribution to total income at 68 percent and 56 percent respectively owing to their huge loan books.
“The contribution of interest income is expected to remain constant as the banks take a cautious approach to lending following the liquidity challenges prevailing in the economy,” said AfrAsia.
Economist, John Robert-son, said banks were likely to adopt a conservative approach to lending in the medium term driven by an uncertain credit environment which has translated into rising non-performing loans.
It is, therefore, expected that loans and advances would follow a less aggressive trajectory relative to deposits.
“The prevalence of short term lending, coupled with subdued capital inflows, has deprived the economy of investment in capital projects which are an imperative for sustainable economic growth,” said Robertson.
Banks seem to have exhausted their capacity to continue to implement cost containment measures as the cost to income ratio remained around 60 percent from 70 percent in December last year.
As liquidity improves, banks are expected to increase long-term lending to the productive sectors of the economy. Such long-term financing is critical to the revival of domestic industries which need to re-equip, refurbish as well as replace obsolete machinery.
Banks are unique businesses, not only as guarantors of deposits, but also as suppliers of capital without which an economy cannot function. This balancing act is reflected in the value of a bank’s lending as a proportion of the money it has in deposits.
The RBZ is on record expressing serious concern on the attitude by some multinational banks towards the need to actively support the domestic economy.
The RBZ said banking institutions should balance the need for sound risk management and financial intermediation in order to boost confidence in the financial sector and spur economic recovery.
However, the quest for more profits by some banks has often been at the expense of sound lending practices.
Since the economy was dollarised, the then minister of youth indigenisation and empowerment, Saviour Kasukuwere, criticised foreign banks for not lending to local companies.
Kasukuwere accused internationally-owned banks of paralysing the money and capital markets by sterilising huge domestic deposits which funds they were not passing on to the productive sectors of the economy through lending.
As a result, the outlook appears gloomy. The World Bank this month said the 2014 outlook for Zimbabwe’s economy remain increasingly uncertain due to a host of internal and external factors.
In its September Economic Briefing, the World Bank said growth in Zimbabwe was rapidly fading, and after 4, 4 percent recorded in 2012, the growth projections for 2013 have been revised downwards to three percent, with little prospects for a recovery in 2014.
“The economy faces uncertainty both from expected volatility in the global economy, and on the domestic front after July elections, amidst worsening macroeconomic indicators and increased vulnerability of the banking sector,” the World Bank said.
As Zimbabwe’s external position has been supported by substantial short-term capital inflows, the situation would be compounded by the risk of capital outflows from emerging markets, as the United States Federal Reserve progressively unwinds its expansionary monetary policy.
“Growth performance has been stymied by continued slowdown of the key sectors of the economy, amidst easing of international commodity prices, low investment, tight credit conditions, and policy uncertainty after the July elections,” the World Bank said.
Deposits for commercial banks decreased by 3,3 percent from US$3,97 billion in December 2012 to US$3,84 billion in June 2013.
As at June 30, 2013, AfrAsia said short term deposits, which comprise of demand savings and under 30-day deposits, constituted 85,3 percent of the total deposits.
Long term deposits improved slightly from 14,2percent in December 2012 to 14,7percent in June 2013. Comparatively, deposit rates particularly for term deposits have generally improved, reflecting banks’ efforts to mobilise long term non-transitory deposits.
However, deposit concentration remains skewed towards the five top tier banks.
Out of the 16 financial institutions under consideration, CBZ Bank had the largest share of deposits at 27,9 percent, equivalent to US$1,07 billion (excluding interbank), followed by CABS (11,7 percent or US$449,7m), ABC (10,6 percent or US$407m), Stanbic (8,7 percent or US$334m), and Standard Chartered (8,5 percent or US$329m).
Other middle tier banks with a sizeable share of deposits included Barclays (six percent), ZB (5,8 percent)and FBC (4,7 percent).
“In terms of growth in total deposits, NMB registered the highest annual growth rate of 85 percent to US$216 million in June 2013, followed by CABS which registered a growth of 40 percent to US$449,75 million. MBCA however registered a decline ( five percent) in bank deposits to US$147,9 million.
Reflecting on financial intermediation by banks, loans and advances on the other hand increased by three percent to US$3,66 billion (sustained by offshore lines of credit),” said AfrAsia.