Zim banks resilient despite headwinds

October 7, 2021

LIVINGSTONE MARUFU

 

Local banks  turned in a robust performance in the top line in 2020 on the back of punitive bank charges at a time when almost all other sectors in the country are teetering on the brink due to a sluggish economy and severe Covid-19 headwinds,  a new report shows.

There are now growing fears the high bank charges could further diminish confidence in the financial sector, which is critical in allocating resources  in an economy.

According to a report published last week by brokerage firm, IH Securities, local lenders registered the highest profitability in the region, amounting to more than ZWL$30bn.

For example, Zimbabwe banks’ return on equity (ROE), which is a key ratio in measuring profitability, increased 46% in 2020 from 33% in 2019, while that of banks in  Botswana decreased  to 15.1% from 19.4% in 2019.

The decline, according to the report, was on the back of an increase in bank loan defaults due to the Covid-19 pandemic which presented challenges to the financial sector.

In Zambia, ROE  declined to 12.9% from 16.2% in 2019.

The growth comes despite the Zimbabwe’s economy suffering a 4.1% contraction  last year.

Finance Minister, Mthuli Ncube has, however, projected a 7.8%  growth this year on the back of  a good agricultural season.

More so, the economy was last year  hit hardest by the economic impact of Covid-19. Government put in place lockdown measures to curb the spread  of the deadly  Covid-19 pandemic.

Despite the severe headwinds, banks reported strong performance and sturdy balance sheets, suggesting a stronger and more resilient  financial sector.

The local lenders have achieved this through usurious bank charges and interest rates on loans and services to vulnerable depositors.

Last year, the Reserve Bank of Zimbabwe (RBZ) halved interest rates to 35% from 70%.

Given that, several analysts predicted a squeeze on bank profits.

But, the cut did not hurt lenders’ profitability.

Instead, lenders  reported a 434.17% surge in profitability to ZWL$34.24bn in 2020 from ZWL$6.41bn reported in the previous year, according to research done by IH Securities.

The  sharp uptick in profitability was largely attributed to a sharp rise in non-interest income such as bank charges, commissions, and fees. Non-interest income constituted 79.49% of total income.

This has infuriated long-suffering depositors who said the sharp rise in service charges were a bitter pill to swallow.

“The growth in net profit outperformed annual inflation for the same period which stood at 362.6%,” IH Securities said.

It said banking sector profitability as measured by the return on equity (ROE) and return on assets (ROA) continued to improve.

Although cyclical, the trajectory for both return on equity and return on assets  has generally been on an upward trend, IH Securities said.

“ROE for the year 2020 stood at 46% compared to 33% recorded in the same period 2019, while ROA closed the year at 14%, five percentage points higher than prior year’s ROA of 9%,” it said.

The report also showed that the lenders’ loan portfolio quality  improved in the period under review as reflected by a decline in the non-performing loans to total loans ratio  to 0.31% from 1.75%.

Total banking sector deposits surged 527.48%  to ZWL$205.34bn from ZWL$30.53bn in 2019,on the back of an increase in US$:ZWL$ exchange rate which resulted in FCA accounts registering significant growth rates from foreign currency translations.

FCA deposits closed the year at 50.35% of total deposits followed by demand deposits which contributed 42.28% of the total deposits at the end of 2020.

Demand deposits are largely transitory, posing a large liquidity mismatch between long term assets created using funded income.

“The country’s deposit base continues to lean towards demand deposits which limits the sector’s ability to lend long term funds.

This will continue to hamper efforts to grow capital intensive industries,” IH Securities said.

The research also showed that CBZ maintained its position as the largest bank in terms of deposits at ZWL$65.19bn, followed by Stanbic which closed the year with deposits of ZWL$35.54bn.

The sector’s loans and advances during the period under review, increased to ZWL$82.41bn  from ZWL$56.76bn.

The sector’s liquidity ratio closed the year at 73.06%, way above the minimum regulatory requirement of 30%.

“The high prudential liquidity ratio for the banking sector was partly a reflection of the cautious lending approach being adopted by banking institutions in light of macroeconomic vulnerabilities.

The improvement in the NPLs ratio is also attributed to some banking institutions enhancing their credit risk management practices through their loan grading methodologies, recoveries and write-offs,” IH Securities said.

 

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