Motswedi Securities financial analyst, Garry Juma says the cautionary statement issued by First National Bank Botswana (FNBB) about anticipated suppressed earnings does not come as a surprise, given the tough operating environment in the banking sector.
“The low interest rate environment and the decline in disposable income, which are reducing transaction volumes, are some of the challenges the banking sector has had to grapple with,” he said.
FNBB, the country’s largest commercial bank by market capitalization, recently issues a cautionary statement indicating that it anticipates lower financial results for the interim period that ended 31 December 2015. Juma said the low interest environment could persist and make things tougher for FNBB and other banks, as another interest rate cut cannot be ruled out.
“With inflation at 3.1 percent by December 2015 and the economy growing at a smaller pace, another interest rate cut by the Bank of Botswana to spur the economy cannot be ruled out,” he said.
He cautioned that any further interest cut will eat into local banks’ interest margins and affect their profitability.
“Going forward, it is our view that the survival of the banking sector will be premised on their ability to grow non-interest income and diversify income away from interest income,” said Juma.
Although FNBB’s financial position remains strong, it has generally performed badly during the financial year that ended in 30 June 2015. The bank had however delivered a fair set of results for the half year ended December 2014. FNBB’s anticipated material change on its financial results comes several months after a period of reduced liquidity that rocked the banking sector and forced the central bank to change some of its monetary instruments. By end of 2014, leading commercial banks tightened their credit lending schemes as the loan/deposit ratio in the rose to unprecedented levels. At the same time, deposits increased at a slower pace of 31.7 percent from P40.4 billion to P53.2 billion between 2010 and 2014. The Central Bank has urged banks to put more emphasis on deposit mobilisation and improved financial inclusion as measures of improving the operating environment. FNBB as well as other Botswana Stock Exchange (BSE) quoted banks are expected to publish their financial results in the next few weeks.
