Higher credit growth expected for 2018
An investment analyst with Stock Brokers Botswana, Donald Motsomi has said conversations with industry leaders in the banking sector give credence to an expectation of higher credit growth in 2018 largely on the back of increased government spending which is also expected to boost business activity in the economy.
This comes on the backdrop of a harsh 2016 that saw the sector’s profitability came under pressure with net income declining by 9.6% and ROE falling to 7% (2016: 14.4%). Writing in the Stockbrokers Botswana Banking Sector review report, Motsomi indicates: “We are therefore cautiously optimistic of a pickup in credit growth and have factored this into our forecasts. Rates are expected to remain unchanged, and we have also factored the October rate cut to translate to a slight reduction in interest margins.”
He says given the low interest rate environment and tight competition in the sector, banks are looking to increase the contribution of non-funded income to their revenues. The SBB analyst furthers states that there is an increased focus on digitization through numerous initiatives including mobile technology, enhanced ATM functionalities, online banking, and partnerships with merchants through point of sale machines. There is growth potential from leveraging on these initiatives. Further, banks are increasingly diversifying their services through offering insurance and wealth management services.
“The commercial banking segment of the sector could see the entry of a new player in the short to medium term. Botswana Building Society (BBS), a statutory bank registered as a society, is currently undergoing demutualization and conversion into a public limited company with the intention to obtain a commercial banking license from the Bank of Botswana. BBS, although looking to focus mainly on the unbanked, would intensify competition in the sector through financing banked individuals and SMMEs given they obtain the license. The bank has an established customer base from its property finance loans and saving and investment products, which it could leverage on.”
According to Motsomi, the implementation of IFRS 9 is set to impact the banks, with some more poised to withstand the hit than others. Banks’ capital is set to be negatively impacted. “FNBB and Barclays both have strong capital positions, while Stanchart’s capital levels were weakened by the heavy loss incurred in 2017. The bank is currently looking at various options to enhance its capital base in preparation for the standard’s implementation. The standard will also require impairment recognition to be incurred in a timelier manner.”
Motsomi argues that the banking industry landscape has changed over the last five years with credit growth slowing from double digit growth to the lows seen in 2017. Furthermore, the Monetary Policy has been accommodative over the period with the bank rate coming down from 9.5% in 2013 to 5% in 2017. He states that the decline in credit growth and rates over the years, as well as increased competition has seen the industry’s profitability normalizing, as seen from some of the listed banks’ ROEs coming down from as high as 30 – 40% to regions of 18 – 24%.
“The period under review, 2017, was a challenging one for the sector characterized by slower GDP growth of 2.4% (2016: 4.3%), weak business confidence, and marginal growth in employment creation and wages. These factors translated to credit growth of 5.6% (2016: 6.2%), with reports of businesses generally holding back on utilizing facilities and the aforementioned pressures on households limiting their capacity to take on more debt,” writes Motsomi in the SBB Banking Sector Review.
Going forward, Motsomi and the SBB analysts expect household credit growth to moderate on the back of the pressures faced as well as higher expected inflation for 2018. They stress that Business credit growth should be more robust given higher levels of business confidence for the year as per Bank of Botswana Business Expectations Survey, and increased government spending in the run up to next year’s general elections.
Sector Review
Commenting on the 2017 decline in credit growth to 5.6% (2016: 6.2%), Motsomi says it was attributable to a slowdown in lending to both businesses and households. Annual credit growth to businesses was 3.2% (2016: 4.2%), which was largely due to loan repayments by parastatals. Household credit growth was 7.2% (2016: 7.6%), the lower growth largely attributable to lower growth in mortgage lending of 4.8% (2016: 6.3%) while in contrast; unsecured loan growth was higher to 8.8% (2016: 8.3%).
Total deposits growth was sharply lower at 1.8% (2016: 4.1%) owing to a reduction in household deposits of -8.4% (2016: -3.6%) indicative of the pressures consumers are facing. Business deposits growth albeit lower was robust at 5.1% (2016: 7.2%). According to the SBB Banking Sector review, the higher growth in credit compared to funding saw the sector Loan to Deposit ratio increase to 85.2% (2016: 82.2%).On the backdrop of an economy operating with a negative output gap and the positive inflation outlook, the Central Bank cut the Bank rate by 50 bps to 5% (Prime rate: 6.5%) in October 2017.
“The impact on credit growth, if any, will be seen in 2018 as well as further squeeze on the sector’s margins. Lower deposit rates in line with the rate cut could act as a disincentive for households to save, which would exacerbate the reduction in household deposits further. A continuation of this trend would make it particularly difficult for banks to constrain their cost of funding given that 75.8% of total deposits are business deposits, which are relatively costlier.”
The Review states that Sector net interest income rose 3.4% on the back of higher interest income growth of 3.0% in comparison to interest expense growth of 1.7%. Non-interest income increased 3.0%. Despite this growth, the sector’s profitability came under pressure due to higher provisioning and operating expense growth.
Meanwhile Provisions increased 17.9%, with NPLs/Total Loans rising to 5.3% (2016: 4.9%). The higher NPL ratio was a result of higher NPLs/Total Loans for businesses, which increased to 6.4% (2016: 4.9%). However, NPLs/Total Loans for households reduced to 4.5% (2016: 4.9%). “This is a comforting development considering the concerns over high indebtedness of households.
Faster growth in expenses vis-à-vis income translated to a higher cost to income ratio of 63.9% (2016: 57.0%). Ultimately, sector net income declined 9.6% and ROE more than halved to 7% (2016: 14.4%). We believe Stanchart’s losses for 2017 played a significant part in the sector’s profitability decline given the bank’s large market share,” observes Motsomi.
There are 10 licensed commercial banks in Botswana, with the 5 largest banks accounting for 90% of total assets according to the latest Banking Supervision Annual Report. The listed banks, First National Bank Botswana, Barclays Bank of Botswana, and Standard Chartered Bank Botswana are amongst these dominant players.
Business
LLR transforms from Company to Group reporting
Botswana Stock Exchange listed diversified real estate company, Letlole La Rona Limited (“LLR” or “the Company” or “the Group”), posted its first set of group financial statements which comprise the Company and Group consolidated accounts, which show strong financial performance for the six months ended 31 December 2023, with improvements across all key metrics.
The Company commenced the financial year with the appointment of a Deputy Chairperson, Mr Mooketsi Maphane, in order to bolster its governance and enhance leadership continuity through the development of a Board and Executive Management Succession Plan.
At operational level, LLR increased its shareholding in Railpark Mall from 32.79% to 57.79% and proudly took over the management of this prime asset.
The CEO of LLR, Ms Kamogelo Mowaneng commented “During the period under review, our portfolio continued to perform strongly, with improvements across all key metrics as a result of our ongoing focus on portfolio growth and optimisation.
“We are pleased to report a successful first half of the 2024 financial year, where we managed to not only grow the portfolio through strategic acquisitions and value accretive refurbishments but also recycled capital through the disposal of Moedi House as well as the ongoing sale of section titles at Red Square Apartments. The acquisition of an additional 25% stake in JTTM Properties significantly uplifted the value of our investment portfolio to P2.0 billion at a Group level. Our investment portfolio was further differentiated by the quality of our tenant base, as demonstrated by above market occupancy levels of 99.15% and strong collections of above 100% for the period”.
The growth in contractual revenue of 9% from the prior year’s P48.0 million to the current year P52.2 million, increased income from Railpark Mall, coupled with high collection rates, has enabled the company to declare a distribution of 9.11 thebe per linked unit, which is in line with the prior year.
In line with its strategic pillars of ‘Streamlined and Expanded Botswana Portfolio’ as well as ‘Quality African Assets’, the Group continuously monitors the performance of its investments to ensure that they meet the targeted returns.
“The Group continues to explore yield accretive opportunities for balance sheet growth and funding options that can be deployed to finance that growth” further commented the CEO of LLR Ms Kamogelo Mowaneng.
Ms Mowaneng further thanked the Group’s stakeholders for their continued support and stated that they look forward to unlocking further value in the Group.
Business
Botswana’s Electricity Generation Dips 26.4%
The Botswana Power Corporation (BPC) has reported a significant decrease in electricity generation for the fourth quarter of 2023, with output plummeting by 26.4%. This decline is primarily attributed to operational difficulties at the Morupule B power plant, as per the latest Botswana Index of Electricity Generation (IEG) released recently.
Local electricity production saw a drastic reduction, falling from 889,535 MWH in the third quarter of 2023 to 654,312 MWH in the period under review. This substantial decrease is largely due to the operational challenges at the Morupule B power plant. Consequently, the need for imported electricity surged by 35.6% (136,243 MWH) from 382,426 MWH in the third quarter to 518,669 MWH in the fourth quarter. This increase was necessitated by the need to compensate for the shortfall in locally generated electricity.
Zambia Electricity Supply Corporation Limited (ZESCO) was the principal supplier of imported electricity, accounting for 43.1% of total electricity imports during the fourth quarter of 2023. Eskom followed with 21.8%, while the remaining 12.1, 10.3, 8.6, and 4.2% were sourced from Electricidade de Mozambique (EDM), Southern African Power Pool (SAPP), Nampower, and Cross-border electricity markets, respectively. Cross-border electricity markets involve the supply of electricity to towns and villages along the border from neighboring countries such as Namibia and Zambia.
Distributed electricity exhibited a decrease of 7.8% (98,980 MWH), dropping from 1,271,961 MWH in the third quarter of 2023 to 1,172,981 MWH in the review quarter.
Electricity generated locally contributed 55.8% to the electricity distributed during the fourth quarter of 2023, a decrease from the 74.5% contribution in the same quarter of the previous year. This signifies a decrease of 18.7 percentage points. The quarter-on-quarter comparison shows that the contribution of locally generated electricity to the distributed electricity fell by 14.2 percentage points, from 69.9% in the third quarter of 2023 to 55.8% in the fourth quarter. The Morupule A and B power stations accounted for 90.4% of the electricity generated during the fourth quarter of 2023, while Matshelagabedi and Orapa emergency power plants contributed the remaining 5.9 and 3.7% respectively.
The year-on-year analysis reveals some improvement in local electricity generation. The year-on-year perspective shows that the amount of distributed electricity increased by 8.2% (88,781 MWH), from 1,084,200 MWH in the fourth quarter of 2022 to 1,172,981 MWH in the current quarter. The trend of the Index of Electricity Generation from the first quarter of 2013 to the fourth quarter of 2023 indicates an improvement in local electricity generation, despite fluctuations.
The year-on-year analysis also reveals a downward trend in the physical volume of imported electricity. The trend in the physical volume of imported electricity from the first quarter of 2013 to the fourth quarter of 2023 shows a downward trend, indicating the country’s continued effort to generate adequate electricity to meet domestic demand, has led to the decreased reliance on electricity imports.
In response to the need to increase local generation and reduce power imports, the government has initiated a new National Energy Policy. This policy is aimed at guiding the management and development of Botswana’s energy sector and encouraging investment in new and renewable energy. In the policy document, Minister of Mineral Resources, Green Technology and Energy Security Lefoko Moagi stated that the policy aims to transform Botswana from being a net energy importer to a self-sufficient nation with surplus energy for export into the region. Moagi expressed confidence that Botswana has the potential to achieve self-sufficiency in electric power supply, given the country’s readily available energy resources such as coal and renewable sources.
Business
MMG acquires Khoemacau in a transaction valued at P23Bn
MMG Limited, the Hong Kong-based mining company specializing in base metals, has successfully concluded the acquisition of Khoemacau Copper Mine, a state-of-the-art, world-class copper asset nestled in the northwest of Botswana.
On Monday, MMG announced that the acquisition of Khoemacau Mine in Botswana was finalized on 22nd March 2024. “This acquisition enriches the company’s portfolio with a top-tier, transformative growth project and signifies a monumental milestone in the Company’s journey,” MMG communicated in an official statement published on the Hong Kong Stock Exchange.
Upon completion of the acquisition, MMG remitted to the Sellers an Aggregate Consideration of approximately US$1,734,657,000 (over P23 billion), a sum subject to potential adjustments post-Completion.
In addition to the Aggregate Consideration, MMG, in accordance with the Agreement, advanced an aggregate amount of approximately US$348,580,000 (over P4.5 billion) as the Aggregate Debt Settlement Amount, to settle certain debt balances of the Target Group (Cuprous Capital/Khoemacau).
On November 21, 2023, Khoemacau announced that the shareholders of its parent company [Cuprous Capital] had agreed to sell 100% of their interests to MMG Limited.
MMG is a global resources company that mines, explores, and develops copper and other base metals projects on four continents. The company is headquartered in Melbourne, Australia, and has a significant shareholder, China Minmetals Corporation, which is China’s largest metals and minerals group owned by the Government of the People’s Republic of China.
On December 22, 2023, Khoemacau Copper Mining (Pty) Ltd received the approval from the Minister of Minerals and Energy of Botswana regarding the transfer of a controlling interest in the Project Licenses and Prospecting Licenses associated with the Khoemacau Copper Mine, a result of the Acquisition.
The Botswana Competition & Consumer Authority (CCA) on January 29, 2024, notified the market that it had given its approval for the takeover of Khoemacau Copper Mining by MMG Limited.
On January 29, 2024, the CCA issued a merger decision to the market, stating that after conducting all necessary assessments, it was ready to proceed.
The Competition Authority affirmed that the structure of the relevant market would not significantly change upon implementation of the proposed merger as the proposed transaction is not likely to result in a substantial lessening of competition, nor endanger the continuity of service in the market of mining of copper and silver ores and the production, and sale or supply of copper concentrate in Botswana.
Furthermore, the CCA stated that the proposed merger would not have any negative impact on public interest matters in Botswana as per the provisions of section 52(2) of the Competition Act 2018.
Earlier this month, Minister of Minerals & Energy, Lefoko Maxwell Moagi, informed parliament that his Ministry was endorsing the Khoemacau acquisition by MMG Limited. He noted that not only was the company acquiring the existing operation but also committing to an expansion program that would cost over $700 million to double production, create more jobs for Batswana, and increase taxes and royalties paid to the Government.