Despite an improved banking sector profitability in the first quarter of 2017 for the reporting season ending 31 March 2017, with the key driver being growth in Non Interest Income, banks are not yet out of the woods.
With a prolonged sluggish domestic economy, local banks are still witnessing weak loan demand among other challenges. While commercial banks are working out ways to reduce their dependence on defensive measures through aggressive strategies, burning issues like cybercrime, regulatory compliance and unconventional competition will keep their financials strained.
According to Motswedi Securities Q2 Economic Bulletin the sector is transforming and the primary objective of banks as intermediaries between savers and borrowers is no longer the key the driver of profitability, with complimentary services and fees taking a leading role. Under the current interest rate regime margins remain under pressure with banks forced to improve efficiencies and cost management to remain afloat.
Banks are trying every means to contain costs.
“We expect impairments to remain above 2% for the second quarter, as BCL and its employees continue to impact on the sector. Furthermore the SARB recently cut rates by 25 basis points, in the wake of a technical recession, placing the local economy under pressure and giving the Bank of Botswana room for a further cut before the end of the year, thereby squeezing bank margins,” reads the report.
According to the same report, Barclays momentum has slowed following a sterling performance in Q1, up by 13.1%, to close Q2 2017, up by a modest 3.5%, at P5.90 per share. FNBB’s performance was flat for the quarter, dipping by 0.7%, while Stanchart saw a massive 14.1% price slip, the biggest move of the quarter.
“We do not believe that the bank is out of the waters just yet, although activity on the counter is slowly improving, with volumes showing participation by institutional investors and not only desperate to sell retail investors. It might be too soon to say the company has turned a corner, but the last financials (Dec 2016), showed an improvement on profits before tax of over 50%, enough to raise interest on the counter,” concludes Motswedi Securities analysts.
Banks' strategies to focus more on non-interest revenue sources for strengthening their top line will not be smooth sailing. Prospects for generating non-interest revenue from sources like charges on deposits, prepaid cards, new fees and higher minimum balance requirement on deposit accounts may continue to be curbed by regulatory restrictions.
The Motswedi Securities Q1 economic bulletin highlights that foreign currency risk remains a sore point for the sector as all three companies are significantly exposed to forex fluctuations. Afinitas, pleasantly shocked the market, moving 10 thebe higher to close the quarter as the best performer in the sector, reads the commentary in the report.
“The stock appreciated by 10.6% following some relatively low volumes for the quarter. In Sept. 2016, the company acquired 50% Africa Event Limited, which runs and owns the Africa Financial Services and Investment Conference, and is the main driver of revenue. However this revenue stream has not been able to keep pace with the growing company’s operating costs. Earnings pershare showed minor improvement, standing at – 0.152 cents (USD) for the period ended Dec 2016.”
The Q2 report indicates that BIHL carried last year’s momentum, as investors continue to buy up the insurance giant’s stock, even with profits on the decline. Demand has seen the stock appreciate by a further 4% for the quarter to extend gains to 7% for the year. It further states that Letshego woes, continued, albeit at a slower pace.
“The company saw a decline in profits for the year, as costs of capital remain a challenge for the evolving micro-lender that has since amassed 6 deposit taking licences in its pursuit to reduce the cost of funds. The Debt to Equity ratio was last at 85% short of the company’s target of 100%, which may prove to be a double sided sword, paving way for growth, at a high cost to investors and increased risk.” Foreign currency risk is another key area of concern, however, with Mozambique, Zambia and Nigeria rebounding the year may end in smiles for investors.
Motswedi Securities says the immediate outlook for the stock however remains damp, selling pressure and expected flat results are most likely see the price take a further knock, before the company can exercise its share buyback programme, after the release of their results in September. “Whether this will actually take happen, is a subject of speculation, but the idea of which may keep the price afloat long enough to for some good news.”
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”