Saturday, November 28, 2020

Increasing costs of deposits

The cost of acquiring deposits is increasing for local banks as record low interest rates force them to offer their main depositors better returns. On the other hand, returns on loans have taken a nosedive.

Customer deposits, which are the main source of funding for the banking industry, grew by 9.3 percent from P69.3 billion in 2018 to P75.7 billion in 2019. The proportion of private-business deposits to total deposits decreased from 49 percent in 2018 to 45 percent in 2019, implying some degree of deposit-source diversification, officials from Bank of Botswana said in the banking supervision report for 2019.

The growth in deposits was on the back of short-term deposits from large corporates, pension funds and institutional investors. About 89 percent of deposits is from corporates while 11 percent is from retail customers, indicating the bank’s reliance on volatile, relatively expensive wholesale funds, the report indicated.

With banks vying for deposits, the cost of acquiring large funds has steadily increased since 2016 and in the same period, the returns on loans funded by the costly deposits has declined. The increase in costs of attracting huge deposits has been due to Bank of Botswana’s accommodative monetary policy, which has seen the benchmark rate cut to record lows over the years. The lower bank rate has caused returns on deposits to decline, forcing corporates to look for better returns elsewhere. Furthermore, the record low interest rates have meant interest income earned from issuing loans has also taken a dip.

The cost of deposits ratio increased from 1.8 percent in 2018 to 2.1 percent in 2019 against the background of increased competition for large-value and highly volatile deposits. The return on loans and advances ratio declined from 9 percent to 6.9 percent. Given enhanced competition for deposits, some banks left interest rates unchanged on some deposit products, benefitting depositors while ensuring stable and reliable sources of funding for banks.

“Banks that tend to rely on wholesale deposits for funding will have relatively high average cost of deposits. Similarly, banks that begin to engage in aggressive marketing for deposits, either due to liquidity concerns  or to fund expansion of their lending business, will have a high average cost of deposits,” the report said.

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