The banking industry landscape in Botswana has changed over the last five years with credit growth slowing from double digit growth to the lows seen in 2017.
The latest banking sector report by Stockbrokers Botswana (SBB) has shown that the decline in credit growth and rates over the years, as well as increased competition has seen the industry’s profitability normalizing.
The sector’s profitability came under pressure with net income declining by 9.6 percent, and the return-on-equity (ROEs) fell from as high as 30 ÔÇô 40 percent to regions of 18 ÔÇô 24 percent.
2017 was a tough year for the banking industry characterized by slower GDP growth, weak business confidence, and marginal growth in employment creation and wages.
As a result, the industry saw a decline in credit growth to 5.6 percent in 2017 from 6.2 percent in 2016; attributable to a slowdown in lending to both businesses and households. Annual credit growth to businesses was 3.2 percent 4.2 percent in 2016, which was largely due to loan repayments by parastatals.
For the households, credit growth realised was 7.2 percent from 7.6 percent in 2016, the lower growth largely attributable to lower growth in mortgage lending of 4.8 percent from 6.3 percent in 2016 while in contrast; unsecured loan growth was higher to 8.8 percent from 8.3 percent in the previous year.
The Bank of Botswana’s 50 bps bank rate cut in October 2017, is likely to impact on the credit growth in 2018 and further squeeze on the sector’s margins. Lower deposit rates in line with the rate cut could act as a disincentive for households to save, which would exacerbate the reduction in household deposits further. A continuation of this trend would make it particularly difficult for banks to constrain their cost of funding given that 75.8 percent of total deposits are business deposits, which are relatively costlier.
Monetary Policy has been accommodative over the period with the bank rate coming down from 9.5 percent in 2013 to 5 percent in 2017.
SBB analyst, Donald Motsomi has observed that, there is expectation of higher credit growth in 2018 largely on the back of increased government spending which is also expected to boost business activity in the economy. Motsomi said, “we are therefore cautiously optimistic of a pickup in credit growth and have factored this into our forecasts. Rates are expected to remain unchanged, and we have also factored the October rate cut to translate to a slight reduction in interest margins.”
Sometime in October 2017, Alphonse Ndzinge whilst he was still
Chief Investment Officer of Kgori Capital indicated that the sluggishness of deposit growth is mainly attributable to several inter-linked factors. The banks have been a lot more selective in deposit growth as they are focusing more intensively on; balance sheet optimization of funding sources; and have been a lot less inclined to hold on to surplus liquidity. This he said, it is a prudent strategy in an environment where their appetite to issue new credit is constrained by the slowdown of economic activity. The strategy for deposit mobilization has aggressively shifted to “stickier” deposits, for instance; current and savings accounts rather than the more erratic institutional deposits from asset managers and insurance companies.
Going forward, Motsomi said they expect household credit growth to moderate on the back of the pressures faced as well as higher expected inflation for 2018. Furthermore, business credit growth should be more robust given higher levels of business confidence for the year as per Bank of Botswana Business Expectations Survey, and increased government spending in the run up to next year’s general elections.
How Botswana’s top three players performed
FNBB, the country’s largest bank posted good results despite a flat loan book. Performance was buoyed by strong non-interest income growth and a reduction in impairments, bringing net income for the interim period 9 percent higher to P346.4 million from P317.8 million in 2016 . The loan book saw growth in its retail segment, largely through scheme loans, however caution on the part of the bank on lending, and business and corporate customers holding back on utilizing credit resulted in a flat loan book. Going forward, the bank’s focus is pivoted on efficiencies, automation and service, while management gives priority to extracting value from its current clientele over growing the customer base. With regard to growing the loan book, FNBB is looking at lending opportunities in tourism, agriculture and mining sectors, as well as public private partnerships
Barclays delivered commendable results for their full year on the back of a significant reduction in impairments and efficient cost controls, with net income increasing 11 percent to P432.1 million from P389.2 million in 2016. The bank’s loan book was flat mid-year but closed the year 14 percent higher with most of the growth having occurred in the last quarter of 2017. According to Motsomi, “we expect growth in interest income to spill over into 2018. However, the bank will likely be looking to mobilize deposits given the high customer loan to deposit ratio of 97.6 percent, which would increase cost of funding.” The bank’s strategy will be focused on growing fee and commission income, cost containment and impairments management. On the lending front, Barclays is looking to fund in the mining space as well as major public sector infrastructure development projects.
Stanchart delivered dismal results for 2017 on the back of a reduction in revenue, a sharp increase in operating expenses, and a huge impairment charge which resulted in the bank posting a loss of P189.3 million from P79.7 million in 2016. Net interest income and net fee and commission income saw slight declines, while similar to its peer Barclays, net trading income reduced significantly on the back of squeezed margins from intense competition. Stanchart will look to drive income growth given its unsustainably high cost to income ratio. The bank is looking to leverage on its international network and will be funding a multinational set to participate in a major electricity infrastructure project in the country. The bank is also looking to lend in the mining space. The commercial banking segment is expected to break even in the current financial year on the back of driving top line growth and cost rationalization. With regard to retail lending, the group sees opportunities to increase the contribution of mortgages and credit cards to income. Considering the weak housing market and pressures on households, Motsomi said the bank will look to tread lightly.