First National Bank Botswana (FNBB) registered 23 percent increase in profit before tax for its financial year ended June 2018 and the banker credits part of this achievement to its rigorous venture into digital innovation.
When presenting audited consolidated summarized financial results on Friday, FNBB Chief Financial Officer Luke Woodford said the growth profit before tax is a results of digital migration, leadership renewal, bedding down of KYC as well reduction in the impairment charge and improved cost efficiencies.
Woodford also revealed another milestone to stakeholders, saying the bank closed the year on a total financial position of P25 billion, mirroring a 5 percent growth year-on-year. He added that FNBB has maintained its deposit market share of just over 30 percent “Due to the Bank having adopted a cautious credit-risk appetite, total gross advances grew by 4 percent year-on-year, compared to market credit growth of 7 percent,” He said.
FNBB chief financial officer explained that customer deposit growth of 7 percent year-on-year emanated predominantly from increases in current account as well as term and notice deposits. The ongoing tight market liquidity position throughout the year resulted in an increased cost of accessing professional funding, he said.
“The effect of this, combined with Bank lengthening the term structure of the funding portfolio resulted in the interest expense line increasing by 27 percent year-on-year, as well as the cost of funds for the Bank increasing from 1.4 percent to 1.7 percent year-on-year,” explained the bank’s finance chief. Woodford further shared that gross advances increase of 4 percent was largely driven via the growth in consumer lending group schemes, and with significant corporate lending transactions in the bank‘s subsidiary Rand Merchant Botswana.
However the WesBank vehicle asset finance portfolio remained flat, reflecting both reduced sales levels in the market and increased competition, said Woodford. Also, according to Woodford, the business banking portfolio decreased materially due to the high percentage of term lending which amortizes in value. The shrink in the portfolio is also due to heightened competition on new transactions according to the chief financer.
When taking into consideration the scarcity of viable lending opportunities the Botswana Stock Exchange listed banking outfit placed additional deposits in the interbank market and extended the tenure of the investment portfolio, Woodford explained that the cash holdings were more efficiently managed with a decrease of 1 percent in cash holdings despite the 7 percent customer deposit grow.
“Notwithstanding the 50bps rate cut during the year, interest income increased by 5% year-on-year largely due to the growth in the asset book and the optimization of the investment portfolio. The non-performing loans (NPL) to gross advances ratio decreased from 7.3 percent in June 2017 to 7.0 percent in June 2018, with the portfolio of P1, 13 billion remaining flat while gross advances increased, “he said.
THE CEO’S TAKE
FNB explained that the 24 percent improvement in the impairment charge on advances was largely driven through the base effect of June 2017 impairments including the impact of the BCL mine closure. When commenting on improvement in the charge, FNBB CEO Steven Bogatsu said that despite this improvement in the charge, management continued to apply prudent collateral haircuts in the current reporting period.
Bogatsu highlighted that the Bank’s customer base increased by 8 percent, closing the year with 502,000 customers. FNBB measures the level of penetration into a customer’s banking requirements through a vertical sales index (VSI), which denotes the number of products each customer uses.
CEO lauds bank performance on digital innovation
FNBB continues to leverage on digital migration and innovation to come up with the best products to better serve their over 500 000 customers, Bogatsu said. “We have connected WiFi in all our brunches to enable our customers to access our exciting products, we know one of the biggest challenges in our country is affordable internet connections,” he said.
FNBB boss on the bank’s milestone
FNBB realized a high increases in end figures than before taxation. The Profit after Tax growth of 29% outpaced the profit before tax growth of 23%, due to a lower effective tax rate. The bank declared an increase of 27% in the annual dividend from 11 Thebe to 14 Thebe per share, emanating from growth in Profits after tax.
Bogatsu noted that despite the positive business sentiments, boosted by the increased business confidence, growth in secured lending facilities will continue to be hampered by the current pressures on the high value retail property sector and commercial office properties. “However, we anticipate growth in targeted financing for some sectors of the economy such as agriculture, manufacturing and tourism, which will be supported by credit guarantees from development finance institutions. NDP 11 also provides an opportunity for the private sector to fund more government projects.” he said
Botswana’s economic outlook
According to Bogatsu, in 2017 Botswana‘s economic growth took a downturn due to negative performance in the base metals sector, with growth slowing to 2.4 percent against 4.3 percent in 2016. “Noting that the growth outlook has improved during the first quarter of 2018 gathering a rise of 4.8 percent quarter on quarter compared to 0.9% at the same time last year we continue to take the view that price growth will be suppressed while both employment creation continues to be restricted and wages growth remains subdued.” He said.
The disposable income of households is expected to remain under strain despite the prevailing low inflation, said FNBB CEO. Bogatsu also noted that the June CPI reading of 3.1 percent, suggests that inflationary pressures will emanate from the supply side of fuel and administered prices. He said headline inflation has averaged 3.2 percent in the twelve months to June, compared to 3.1% at the same time last year.
The partnership between Debswana and Botswana Oil Limited (BOL) which was announced a fortnight ago will create under 100 direct jobs, and scores of job opportunities for citizens in the value chain activities.
In a major milestone, Debswana and BOL jointly announced that the fuel supply to Debswana, which was in the past serviced by foreign companies, will now be reserved for citizen companies. The total value of the project is P8 billion, spanning a period of five years.
“About 88 direct jobs will be created through the partnership. These include some jobs which will be transferred from the current supplier to the new partnership,” Matida Mmipi, Head of Stakeholder Relations at Botswana Oil, told BusinessPost.
“We believe this partnership will become a blueprint for other citizen initiatives, even in other sectors of the economy. Furthermore, this partnership has succeeded in unlocking opportunities that never existed for ordinary citizens who aspire to grow and do business with big companies like Debswana.”
Mmipi said through this partnership, BOL and Debswana intend to impact citizen owned companies in the fuel supply value chain that include transportation, supply, facilities maintenance, engineering, customs clearance, trucks stops and its support activities such as workshop / maintenance, tyre services, truck wash bays among others.
“The number of companies to be on-boarded will be determined by the economics at the time of engagement,” she said. BOL will play a facilitatory role of handholding and assisting emerging citizen-owned fuel supply and fuel transportation companies to supply Debswana’s Jwaneng and Orapa Letlhakane Damtshaa (OLDM) mines with diesel and petrol for their operations.
“BOL expects to increase citizen companies’ market share in the fuel supply and transportation industries, which have over the years been dominated by foreign-owned suppliers. Consequently, the agreement will also ensure security of supply for Debswana operations, which are a mainstay of the Botswana economy,” Mmipi said.
“Furthermore, BOL will, under this agreement, transfer skills to citizen suppliers and transporters during the contract period and ensure delivery of competent and skilled citizen suppliers and transport companies upon completion of the agreement.”
Mmipi said the capacitating by BOL is limited to providing citizen companies oil industry technical capability and capacity to deliver on the requirements of the contract, when asked on helping citizen companies to access funding.
“BOL’s mandate does not include financing citizen empowerment initiatives. Securing funding will remain the responsibility of the beneficiaries. This could be through government financing entities including CEDA or through commercial banks. Further to this, there are financial institutions that have already signed up to support the Debswana Citizen Economic Empowerment Programme (CEEP),” Mmipi indicated.
While BOL is established by government as company limited by guarantee, it will not benefit financially from the partnership with Debswana, as citizen empowerment in the petroleum value chain is core to BOL’s mandate.
“BOL does not pursue citizen facilitation for financial benefit, but rather we engage in citizen facilitation as a social aspect of our mandate. Citizen facilitation comes at a cost, but it is the right thing to do for the country to develop the oil and gas industry,” she said.
Mmipi said supplying fuel to Debswana comes with commercial benefits such as supply margins. These have traditionally been made outside the country when supply was done by multi-nationals for a period spanning over 50 years. With BOL anchoring supply for Debswana, this benefit will accrue locally, and BOL will be able to pay taxes and dividends to the shareholders in Botswana.
PwC Africa has presented the eighth edition of the VAT in Africa Guide – Africa re-emerging. This backdrop of renewal informs on the re-emergence of African economies and societies which have been affected by the COVID-19 pandemic.
In this edition, which has been compiled by PwC Africa’s indirect tax experts, covers a total of 41 African countries. It is geared towards sharing insight with our clients based on the constantly changing tax environments that can have a significant impact on business operations.
Within Africa, governments continue to focus on expanding the tax net by improving revenue collection through efficient compliance systems and procedures. PwC Africa has observed that revenue authorities also continue to take a keen interest in indirect taxes as part of revenue mobilisation initiatives.
Maturing VAT system and upskilling SARS
“In South Africa, VAT is becoming more relevant as a revenue source for the government,” says Matthew Besanko, PwC South Africa’s Indirect Tax Leader. “Strides have been made to upskill South African Revenue Service (SARS) staff and identify VAT revenue leakages, particularly in respect of foreign suppliers of electronic services to people and businesses in South Africa.”
Broadening the tax base and digital economy
In the past year, South Africa, Mozambique and Zimbabwe saw updates to their VAT legislation, or introduced specific legislation targeting electronically supplied services (ESS), which is in line with the global trend of attempting to tax the digital economy. “The expectation is that Botswana will also introduce VAT legislation in due course, while the National Treasury in South Africa has also made mention of revising the rules to account for further developments in the digital economy,” Besanko says.
South Africa’s National Treasury has also drafted legislation with the intention to introduce a reverse charge on gold, which is expected to come into effect later in 2022. While in Zimbabwe, revenue authorities have introduced a tax on the export of raw medicinal cannabis ranging between 10% and 20%, which came into effect on 1 January 2021.
ESG and carbon tax
Key strides have also been made within the Environmental, Social and Governance (ESG) space. “ESG leadership, strategising and reporting is essential now for organisations that wish to flourish and remain relevant,” Kabochi says. He adds that companies need to consider how ESG and tax intersect, since tax is a significant value driver when businesses need to deliver on their ESG goals.
In South Africa, a carbon tax regime, which is being implemented in three phases, has been adopted. The second phase was scheduled to start in January 2023, however phase one was extended by three years until 31 December 2025.
Until then, taxpayers will enjoy substantial tax-free allowances which reduce their carbon tax liability. At the beginning of 2022, the South African government increased the carbon tax rate to R144 (about US$9), which is expected to increase annually to enable South Africa to uphold its COP26 commitments.
With effect from 1 January 2023, carbon tax payers in South Africa will also be required to submit carbon budgets and adhere to the provisions of the carbon budgeting system which will be governed by the Climate Change Bill. Where set carbon budgets are exceeded, the government plans to impose penalties. “At PwC, we are continuously focused on our renewed global strategy, ” The New Equation,” Kabochi says. “Through this strategy, a key focus area for PwC Africa is to support clients in adding value to their ESG ambitions and building trust through sustained outcomes.”
The New Equation is also an acknowledgement of the fundamental changes in the business environment in which PwC’s clients and other stakeholders operate. PwC continues to reinvent and adapt to these changes as a community of problem solvers, combining knowledge and human-led technology to deliver quality services and value.
Local and international economists have lowered their projections on Botswana’s economic growth for 2022 and 2023, saying the country is highly likely to fail to maintain high growth rate recorded in 2021 hence will not reach initial forecasts.
Economists this week lowered 2022 forecasts for Botswana’s economic growth rate, from the initial 5.3% to 4.8% and added that in 2023 growth could further decline to 4.0%. The lower projections come on the backdrop of an annual economic growth that recovered sharply in 2021 with figures showing that year-on-year real Gross Domestic Product (GDP) growth increased to 11.4%, up from a contraction of 8.7% in 2020.
Economists from the local research entity, E-consult, this week stated that the 2021 double digit growth that exceeded projections made at the time of the 2022 budget may be short lived due to other developments taking place in the global economy. E-consult Economist Sethunya Kegakgametse stated that the war in Ukraine has worsened supply problems in the global economy and added that before the war, macroeconomic indicators were seen as improving and returning to pre-COVID levels.
According to the economist the global economy was projected to improve in 2022 and 2023. Recent figures show that global growth projections have been revised downwards from the initial forecast of 4.9% in 2022 with the World Bank’s new estimate for global growth in 2022 at 3.2%.
The statistics also shows that International Monetary Fund revised their growth projections for 2022 and 2023 down by 0.8% and 0.2% respectively, falling to 3.6% for both years. “The outbreak of war has severely dampened the global recovery that was under way following the COVID-19 pandemic,” said the economist.
She stated that despite Botswana being geographically removed from the conflict, the country has not and will not be exempt from the disruptions in the global economy. “The disruptions to global supply chains resulting from the war will have a negative effect on both Botswana’s growth and trade activities.
The economic sanctions against diamonds from Russia will add uncertainty to the market which will have knock on effects to Botswana’s growth, exports, and government revenues,” said the economists who added that the disruptions are driving prices up and result with very high inflation in the local economy.
Kegakgametse projected that in an attempt to limit inflation Bank of Botswana will be forced to raise interest rate “Should the sharp increase in both global and local inflation persist, Bank of Botswana much like other central banks around the world will be forced to raise interest rates in a bid to control rising prices. This would mean an end to the expansionary monetary policy stance that had been adopted post COVID-19 to aid economic growth,” she said.
In the latest projections, the UK based economic research entity Fitch Solutions lowered 2022 real GDP growth forecast for Botswana from 5.3% to 4.8% “In 2023, we see economic growth rate decelerating to 4.0%,” said Fitch Solutions economists who also noted that the 2022 and 2023 economic growth projections may come out lower than the current forecasts, as it is possible that new vaccine-resistant virus variants may be identified, which could result in the re-implementation of restrictions. “In such circumstances, we cannot rule out that Botswana’s economy may post weaker growth than our baseline scenario currently assumes,” said the economists.
According to the projections, Fitch Solution stated that there is limited scope for Botswana government to increase diamond production and exports, following the economic sanctions imposed on Russian diamond mining companies operating in Botswana. The research entity added that De Beers is unlikely to scale up diamond output from Botswana in order to prop up diamond prices.