Sunday, May 26, 2024

Banks profitability slumps

Restricted movements that reduced traffic to branches, record low interest rate, missed loan payments and reduced charges, contributed to banks lagging behind in profitability compared to previous periods.

In the nine months to September, commercial banks in the country raked in P6.7 billion, slightly lower than P6.6 billion recorded in the same period last year. After accounting for expenses and taxation, bank profitability in the nine months of the year fell to P1.1 billion compared to the P1.2 billion registered in September 2019.

The advent of Covid-19 this year has a been a damper to what has been an impressive run in the lucrative banking sector. Expectations were high that 2020 will deliver solid returns than in previous years as banks optimised their services and products. It has been 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 removal 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 in 2018.

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 bank 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.

It remains to be seen if there will a significant rebound in the last quarter of the year, with the pandemic subsiding and the government injecting billions into the economy in addition to increased civil service wages.

Bank of Botswana had also taken measures to support banks during the 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.

The central bank in April slashed the bank rate to 3.75 percent and this week in its last meeting maintained the rate.


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