Botswana’s banking sector, largely seen as resilient and at most, lucrative, showed signs of cracks last year after a historic 2018, and growing concerns that current developments this year might widen the cracks.
The expectation was high that Botswana’s ten commercial banks will cross 2019 as another record year of earnings following the P2 billion net income recorded in 2018, the highest bank earnings in the history of the country. It was a remarkable comeback for an industry whose profitability was hampered in 2013 after Bank of Botswana (BoB) imposed a moratorium on banking fees and charges, ending consecutive years of rising profits, and beginning a steep decline that only came to an end in 2018.
Bank profits fell from 2013’s P1.7 billion, touching new lows of P1 billion in 2015, also on the back of the bank rate that was reduced from 7.5 percent to 6 percent. Profitability started improving in 2016 following the suspension of the moratorium, resulting in an increase of P1.4 billion in net income, despite another bank rate cut to 5.5 percent. In addition, the banking industry saw a surge in bad debts due to the closure of the BCL mines, estimated to have wiped more than 6,000 jobs.
The loan impairments were more significant in 2017 and coupled with the reduction of the bank rate to 5 percent, the banks’ net income slipped to P1.2 billion. In response, the banks tightened credit lending policies, avoiding risky sectors, also increasing banking fees and charges, propelling banks to the historic P2 billion cumulative profits.
The following year, it appeared banks were headed for another historic year, with the first half of 2019’s net income outperforming 2018’s corresponding period. However, in the second half of the year, the central bank reduced the banking rate to 4.75 percent, while loan impairments also soared, resulting in total net income of P1.7 billion – the third highest after the 2018 and 2013 net incomes.
A resurgence this year is highly unlikely even though commercial banks began 2020 on a high note. The bank assets grew to P99.1 billion in January, up from last year’s P98.7 billion, with growth coming from increase in loans extended by the banks in the first month of the year, according to BoB’s financial statistics for January.
Though data for February and March might still reflect positive sentiments in the banking industry, the impact of Covid-19, the disease caused by coronavirus, started to afflict the country’s economy in early March, and measures later put in by the government to tame the spread of the virus in April, including restricting movements, thus affecting consumer spending and trade, will certainly have a negative effect on the banking industry.
Besides the lockdown imposed by the government, the commercial lenders, at the insistence of government, made some concessions, including loan repayments holidays that will run for up to three months to selected clients. To reduce traffic at brick and mortar branches, banks have urged their customers to use digital channels, as most banks offer incentives such as reduced banking fees and charges on the digital channels, a decision which is likely to lower non-interest income.
The central bank has also taken measures to support banks during challenging period, like increasing liquidity by allowing banks to hold less reserves with the central bank, and also making it cheaper for the banks to borrow, while waiving some regulations to allow banks to restructure loans, including loosening restrictions on how banks assess non-performing loans and determination of expected credit losses.
Still, there are whispers that the central bank is likely to slash the bank rate next week during its scheduled Monetary Policy Committee (MPC) meeting on April 30, following in steps of other central banks’ response to the havoc caused by coronavirus. However, financial industry insiders have warned that cutting the bank rate will do more harm to banks as it will lower interest income during a time when some loan repayments are suspended, and will also affect other investment institutions that have invested in money markets, thus reducing valuations.