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.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”