AT least US$48 million was lost in the banking sector last year after profitability slumped in response to an interest rate deal signed between the Reserve Bank of Zimbabwe (RBZ) and financial institutions, binding both parties to a moratorium on rates hikes. The memorandum of understanding signed in February 2013 compelled the industry to reduce lending rates, then hovering over 20 percent per annum, scrap exorbitant bank charges and pay interest on deposits.
Account holders had until then been receiving zero percent interest on deposits. The market had been outraged by the punitive interest rates which almost forced government to move in with a Statutory Instrument to safeguard depositors and promote a culture of saving. While the US$48 million was slightly lower than the US$73 million earlier estimated by banks to be the cost of their action on interest rates, it sends a clear message to the authorities of the dangers of controlling prices.
A comprehensive report on the banking industry released by advisory firm, MMC Capital last week indicated that banks, battered by the rates deal, subdued business in a liquidity starved market and crippled by high nonperforming loans, shaved a combined 37 percent of their post-tax profits during the year to December 31, 2013. Profit after tax for the industry retreated to US$83,8 million in 2013, from US$132 million in 2012.
“The effects of the memorandum of understanding which took effect in February 2013 got the better of banks as industry profitability deteriorated by 36,45 percent to US$83,8million,” said MMC Capital, one of the country’s leading research firms.
Head of research at Econometer Global Capital, Takunda Mugaga said it was clear from the start that the agreement would seriously knock profitability. Independent economist, John Robertson said the problem facing the banking industry was that the central bank had tried to deal with symptoms and yet the real problem was the scarcity of money. He said as long the scarcity of money remained; it would be difficult to solve the problems facing the sector.
According to MMC, growth in other aspects of the banking system, such as deposits, also slowed down, even after analysts had predicted massive expansion following the deal, which was expected to see depositors generating interests from their savings. Given the destruction of political and institutional credibility that has shattered the markets in the past decade, it could be difficult for banks to regenerate market confidence.
Financial assets including those of pensioners were literally wiped out during the hyperinflation period, which ended in 2009. Now, there have been reports that following dollarisation four years ago, politicians were contemplating the return of the Zimbabwe dollar, a situation that could further dampen depositor confidence and hammer profits for banks this year. Economic growth has been curtailed by a large external debt, high unemployment and depressed disposable incomes.
“The Zimbabwean banking sector is growing, though asset creation quality and profitability remain an issue. Total banking deposits, at US$4,73 billion as at December 31, 2013, were 21,59 percent higher relative to the prior year. In 2012, the total deposit base grew 30,7 percent. The slowdown in deposit growth is mainly attributable to the decline in the marginal propensity to save. The FY (full year) 2013 financial results for banks bear testimony to the fact that banking deposits are reverting to higher concentration levels. Our view is that this trend points to a cautious banking market and the ‘flight to quality’ concept,” said MMC Capital.
The report also indicated that;
-Income statement impairment charges increased by 70,91 percent to US$71,44 million in 2013, a figure which casts doubt over the quality of asset creation in Zimbabwe.
-Two banks, CBZ and NMB contributed almost 50 percent to the impairments. Total assets grew by seven percent and the loans to deposit ratio weakened to 78 percent (December 31, 2013) from 92 percent (December 31, 2012) reflecting a shift in lending approach in line with the risky credit environment.
-In line with the growth in deposits, industry credit extension in the form of loans and advances rose to US$3,70 billion as at December 31, 2013 from US$3,5 billion as at December 31, 2012.
-Lending by some major banks remains tightly concentrated with some players indicating that they are prepared to lose market share in certain asset classes to ensure that loans are of an appropriate quality and margin.
-The long-term component of deposits, at 18,4 percent, came in lower compared to 20,65 percent in 2012, highlighting that the capacity of the banks to extend the much-needed long-term facilities to various sectors of the economy remained constrained as demand for credit outstripped supply.
CABS made its debut in the MMC top tier band as it improved to second position after gathering 11,21 percent. In the prior period the building society ranked third with a market share of 9,23 percent. BancABC, which garnered the second position in 2012 dipped to the fourth position after being overtaken by both CABS and Stanbic.
Zimbabwe’s banking industry has just emerged out of a crisis that shook the industry in 2004 and 2005, leaving at least half a dozen players closed and many more teetering. Incoming central bank governor, John Mangudya said the apex bank would put in place measures to stabilise the industry.