Tuesday, March 5, 2024

Banking industry applies brakes on lending

The usually resilient and profit churning banking sector is bracing for a slowdown this year, a slight disruption to the high momentum from the past two years. 

The industry has now tightened its lending amid record low interest rates and growing concerns about uncertainty brought by Covid-19 disruptions.

It was another great year for the banking industry in 2019 which boasted of a growing and strong balance sheet since 2017. Total assets for the banking industry grew by 8 percent from P91.3 billion in 2018 to P98.7 billion in 2019, with customer deposits hitting record highs, increasing by 9.3 percent from P69.3 billion in 2018 to P75.7 billion in 2019. 

The increase in deposits helped support a 7.6 percent growth in loans and advances which also increased to all time high of P62.8 billion from P58.3 billion in 2018, driven largely by households which are responsible for over 60 percent of all outstanding loans. 

The overall effect was an increase in the banking sector profitability, supported by  improvement in the banking sector asset quality as measured by non-performing loans. According to Bank of Botswana’s banking supervision report for 2019, the ratio of non-performing loans (NPLs) to gross loans and advances decreased to 4.8 percent last year. Past due loans (accounts in arrears) decreased by 3.7 percent between December 2018 and December 2019; the amount of NPLs declined by 3.6 percent to P3.1 billion in the same period. The ratio of specific provisions to NPLs rose from 42.7 percent in 2018 to 58.2 percent in 2019, reflecting the effect of the International Financial Reporting Standard (IFRS) 9.

In the end, the profitability of the banking industry improved last year as aggregate after-tax profit increased by 5.1 percent from P1.7 billion in 2018 to P1.8 billion in 2019. Profitability ratios remained strong and in line with international norms for banks of comparable size, Bank of Botswana said in the report. 

It was supposed to be another year of bumper profits for the local commercial lenders, made up of nine commercial banks and three state owned banks, Not only were they building on last year’s momentum, but expectation was high that things could only get better; the government workers were due for another salary increment in 2020, and this is a section of society that the local banking industry heavily relies on for unsecured lending – which is the biggest component of household borrowing.  

However, Covid-19 upended things, causing massive disruptions worldwide, and with Botswana government moving swiftly to impose stringent interventions like lockdowns which restricted movements and shuttered business activities for extended periods. Already, major banks have reported reduced profits, with impairments spiking in certain banks. 

Bank of Botswana slashed the bank rate to 4.25 percent in April and also increased bank liquidity by reducing primary reserve requirements, all part of concerted efforts to stimulate lending. The expectation is that increased borrowing by households and businesses will boost economic activities . Instead, local firms surveyed by Bank of Botswana, perceived access to credit to be tight in the second quarter of the year with banks tightening their purses, spooked by likelihood of defaults during the risky period of Covid-19. 

This week, the central bank went ahead and reduced the bank rate by 50 basis points to 3.75 percent, the lowest rate in the country’s banking history. With the recent cut, bank governor Moses Pelaelo hopes that the ham-fisted banks which are hesitant to lend to non-government workers will at least provide cheaper loans to government workers who finally got their delayed salary increments in September. 

As part of their credit risk management, local banks have targeted government employees, but over the years, credit growth has grown slowly as few people are entering the job market and the existing employees are knee deep in debt. The central bank has sounded warning bells to this benign risk of allocating loans to a specific population, especially when the government’s revenues have come under pressure, igniting concerns of how long the government can afford its over P20 billion a year wage bill. 

“Generally, the composite credit risk for the banking industry was considered high. The credit quality is expected to deteriorate in the short-to-medium term as a result of the anticipated negative economic impact of COVID-19 on businesses and households, which is likely to lead to an increase in loan defaults or credit impairments,” the bank said in the banking supervision report.

“A large proportion of bank credit in Botswana is accounted for by the household credit, which, although mostly unsecured, is to a large number of relatively small uncorrelated borrowers employed, in the main, by the public sector.”


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