Finance

Spike in provisions, impaired loans hit Zim banks

PHILLIMON MHLANGA

A steep rise in bad and doubtful debts has forced local banks to increase provisions for impairments as severe economic and financial stress casts serious doubt over the capacity of many retail and corporate borrowers to fulfill their loan obligations, Business Times can report.

Soured loan charges at several banks reached unprecedented levels in the six months to June 2020.

In fact, they have soared to levels not seen since 2009, when Zimbabwe dollarised to escape hyperinflationary pressures.

This means provisions for bad debts are expected to raise credit costs, something which will limit banks’ profits and ability to lend going forward.

The projected cutback on lending will be a blow for local companies that require some funding to reboot after they were affected by Covid-19 restrictions.

It also comes at a time when banks are now operating under a new accounting standard, the International Financial Reporting Standard (IFRS) 9, which compels them to measure expected credit losses and provide for them.

Previously, banks were only looking at “incurred losses”, which meant banks made provisions for loan losses only when borrowers actually missed payments.

Under IFRS 9, banks are required to make provisions based on a loan’s lifetime value.

Among the half years of financial results published recently, CBZ Bank stood out.

The lender’s total loans stood at ZWL$10.1bn in June this year, from ZWL$6.5bn in December 2019.

But, it’s credit loss expense on loans and advances jumped more than 10 times to ZWL$431.8m for the period that ended June 30,2020 compared to ZWL$30.6m in June last year.

That was an increase of more than 1 300%. And the closing allowance for expected credit loss was ZWL$576.7m.

Analysts who spoke to Business Times this week said the amounts banks were losing as borrowers default and their loans have to be written off.

Amounts written off by CBZ in the six months to June 30,2020 amounted to ZWL$23.8m.

ZB Bank also reported a sharp increase in loan impairments which stood at ZWL$79.4m at the end of June this year from ZWL$29m in June last year.

At FBC, impairments allowance at the end of June this year stood at ZWL$57.4m after the lender advanced ZWL 8.4bn.

Last year in June, it was ZWL$7.1m.

First Capital Bank’s allowances for impairment losses stood at ZWL$40m at the end of June this year compared to ZWL$11.3m in June 2019.

Analysts said impairments for the full year were likely to rise to unprecedented levels due to the worsening economic conditions.

There are growing fears of the likelihood of borrowers- retail and corporates- defaulting on their financial obligations in the next 12 months or over the remaining lifetime of the obligation and dwindling consumer income could outweigh revenues.

Many companies and individuals are scrambling to raise funds and hedge exposures.

And the loan loss provisions are likely to push banks’ profits down, experts told Business Times this week.

The banks are also under pressure from low interest rates.

Banks’ net interest income, which measures how much banks earn from loans minus what it pays on deposits, tumbled in the first half of this year after the Reserve Bank of Zimbabwe slashed interest rates to as low as 35%.

Banks have warned a grim outlook would hurt profits in 2021.

Zimbabwe’s economy is currently characterised by strong head winds including hyperinflation, depreciation of the local currency and very volatile business operating conditions.

In addition, the Covid-19 pandemic has had a significant impact on Zimbabwe’s macro-economic environment causing business disruptions.

GDP is expected to contract by more than 10% this year. This exacerbates the already difficult conditions.

Banks are now battling to achieve sustainable asset growth and risk adjusted returns in line with boardapproved risk parameters.

The credit risk that the bank faces arises mainly from corporate and retail loans advances and counterparty credit risk arising from treasury bills and bonds.

 Experts said the introduction of IFRS 9, which introduced the expected credit loss impairment requirements, however, represents a significant change from the incurred loss requirements of International Accounting Standard (IAS) 39.

In its context, expected credit losses are estimates of credit losses that result from default events on a financial instrument that are possible within the 12 months after the reporting date or lifetime.

This is a product of probability of default. It is the chance that borrowers will fail to meet their contractual obligations in the future or at some time during the life of the financial asset.

These are weighted average credit losses that result from all possible default events over the expected life of the financial asset or instrument.

Bank executives have warned that the near term would be difficult.

Although Zimbabwe banks remain well capitalised and ahead of the minimum threshold, the impact of defaults and delays on loan repayment is likely to impair even healthy balance sheets, meaning the banks’ capital buffers, which are meant to ensure the banks can absorb major losses, may be hit hard in the near future.

This means local banks may experience stronger capital headwinds going into 2021.

While local banks have a very efficient system for them to deduct the loan instalments on due date when salaries or deposits are credited into clients’ accounts, borrowers operate multiple accounts, meaning when they want to evade automatic deductions by the banks, they simply switch accounts, leaving banks battling high default rates.

Consequently, several banks have reported millions of dollars in credit impairment charges and loan loss provisions.

They are now ramping up reserves to deal with anticipated loan problems among their clients.

The rainy day fund is meant to cover for future losses.

In his mid-term monetary policy statement, RBZ governor John Mangudya said the apex bank had successfully tested a monitoring module, which is expected to further promote credit risk management in the sector as lenders are automatically notified about significant changes or updates on selected customers such as new facilities or repayments to other lenders.

 In 2016, Czech Republic credit checker, Creditinfo, was awarded the tender to set up a Credit Reference Bureau (CRB) system to improve credit risk management in the financial sector.

The CRB system was expected to, among others; consist of a credit registry and private reference bureau.

This would enhance the verification process of borrowers, enabling bankers to assess credit risk and reduce the level of non-performing loans in the banking sector.

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