Banks’ headache

SHARE   |   Sunday, 26 July 2015   |   By Kabelo Adamson
Banks’ headache

With banks earnings declining, some observers are blaming liquidity challenges, stiff competition among players with one analyst going further to single out their for lack of creativity to offer exclusive and varying products. KABELO ADAMSON reports

Local commercial banks are posting uninspiring results on the back of recent liquidity challenges with analysts warning of more difficult times ahead.     
The Botswana Stock Exchange leading investor by market capitalisation - First National Bank Botswana (FNBB) – this week issued a cautionary note to its shareholders, announcing that the company’s overall performance for the financial year ended 30 June 2015 will be lower than the previous corresponding period.
This follows an announcement from Standard Chartered Bank Botswana a fortnight ago declaring a similar predicament. Its trading statement was more pointed, saying the results “will be significantly lower than those achieved in the corresponding period in the prior year due to the challenging trade environment which has slowed down lending and tightened margins”.
The banks’ announcements provide an overwhelming indication that the big earnings of the past are gone arising from the changed trading terrain.  
In February during the bank’s presentation of the half year results, then FNBB Chief Financial officer (CFO) Boitumelo Mogopa said the bank was operating under hostile environment which includes low interest rate and cautioned that the situation will continue to worsen together with tight liquidity.
A market analyst at Imara Capital Securities, Ndgodya Chimbwete told Patriot Business recently that liquidity shortages are likely to strain commercial banks’ ability to do business and lend money. “So in the short possible effects could be reduced lending, declining profitability for banks due to the likelihood of them pricing up on their deposits to attract customers and getting a reduced return from their lending,” he said back then.
On the back of the challenges some of the banks have stepped up their crusade to secure more deposits by launching different savings products. Bank Gaborone and Standard Chartered Bank Botswana in particular have shown increased aggression in this drive. 
Standard Chartered Bank Botswana CEO, Moatlhodi Lekaukau in April conceded the liquidity challenges while Bank of Botswana governor Linah Mohohlo has continuously dismissed it, blaming the commercial banks for bringing the problem on themselves.
In an interview with Patriot Business on Friday, another research analyst at Motswedi Securities, Tlotlo Ramalepa said the major undoing of the commercial banks is the lower interest rate environment.
“The main revenue source for commercial banks is interest income and because the interest rates are lower it means the banks charge lower and hence are not getting significant proportion from their main source of revenue,” said Ramalepa, adding that lower interest rates contribute negatively on NET interest margins.
Ramalepa is of the view that the main challenge is not necessarily liquidity crisis as the central bank had earlier this year intervened by reducing Primary Reserve Requirement (PRR) to enhance access to BoB lending facilities.
“If you look at the trend in deposits, there has been a decline in deposits which were lower than the rate at which the banks were issuing loans,” he said.
Another major challenge that Ramalepa noted is the competition among the commercial banks. His observation is that banks offer almost similar products and services though differing in fronts such as innovation and others.
Looking forward he said there is likelihood of subdued performance among the commercial banks and does not anticipate any improvement form the sector in any foreseeable future as lower interest rates are expected to continue looking at the current economic environment.
Chimbwete has warned if the current trading environment for commercial banks continues it will render them unprofitable going forward.  

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