Botswana banks face a tough 2015 as the liquidity debacle, further declines in credit growth, and interest margin squeeze continue – the challenge is further compounded by the stagnant economic growth.
More than eight years after the start of the financial crisis, banks have made strides towards improving financial stability but they are still struggling to boost profits. Over the past year 2014, the market as a whole experienced a squeeze in local currency liquidity.
“The year 2015 is going to be another challenging year for financial stocks given the tough economic landscape,” said Garry Juma, an Investment Analyst with local brokerage, Motswedi Securities.
Juma said the moratorium which is still hanging around the banks necks barring them from increasing bank charges on existing products will continue to have an impact on non-interest income.
He observed that the intensifying competition in the banking sector, especially with the presence of new shareholders on Banc ABC (Bob Diamonds) will also make it more tough for the financial sector. “We don’t know what these sharp minds in banking have in store for us,” he said.
He pointed out that the benign inflation might compel the Bank of Botswana to reduce the bank rate once again, further eating on bank’s interest income, which is already under pressure.
“December inflation printed at historic low of 3.8% and further reductions in inflation might prompt the BoB to reduce interest rates. Amidst stagnant economic growth, declining purchasing power, counteractive fiscal changes and banking operations which are tightening the monetary conditions, the BoB might counteract these developments by a rate cut in 2015 to loosen the monetary conditions further,” he said.
“This will be a challenge to banks as they will have to act accordingly in reducing rates on existing loans, while lower deposit rates will be unattractive to savers, thus exacerbating some of the liquidity concerns as loans and advances are likely to grow at a faster pace than deposits,” Moatlhodi Sebabole Research Manager with Rand Merchant Bank (RMB) Botswana stated.
The banking sector is going through a tough time as they are no longer benefiting from the tax revenue which used to accumulate in commercial banks over a long period of time, now the revenue service’s collections are now transferred to the central bank overnight.
In addition parastatal institutions’ balances held in commercial banks have decreased by 18% in the past year. This is a result of the government’s strategy to take on a more prudent and directed funding for its agencies. Instead of receiving the lump sum annual budget for government funded projects, parastatal institutions and local authorities receive funding as and when payments are due.
In the past year total market pula denominated advances has grown faster than deposits. Between October 2013 and October 2014 advances grew by 13.6% whilst deposit grew by only 11.6%.There has been an increase in offshore investments by fund managers. The Bank of Botswana statistics show that from April 2013 the proportion of assets invested offshore increased from 50.9% and reached 55.7% in October 2014.
“The MPC has maintained the bank rate at decades’ low of 7.5% since December 2013. Despite this expansionary monetary stance, actual monetary conditions have swung from being exceptionally easy to being exceptionally tight as a result of changes to tax and parastatals banking arrangements, among others,” said Sebabole.
The market’s loan to deposit ratio (excluding foreign currency) for October reported at 100.2% and liquidity from government to fund activity remains constricted. Sebabole said these constraints have resulted in curtailing of loans and advances by commercial banks.
Additionally, market liquidity remains subdued, with a downward trend in average positions and excess liquidity trending around P1 billion. The market deposit rate curve has shifted upwards as banks compete for limited market liquidity.
“Unless banks become more innovative; the fiscal stance become expansionary and; there is regulation easing on primary reserve requirements, liquid asset classification and capital adequacy requirements, the persistence of liquidity challenges might see great reduction in lending activities which is counteractive to the financial intermediation process and economic-wide expansion,” said Sebabole.
He added that despite the low interest environment, credit slowed down in 2014 as a reflection of: erosion of purchasing power, liquidity squeeze, and increased cost of borrowing and underperformance of several sectors.
In the twelve months to November 2014, y/y total credit growth slowed down to 14% compared to 15.8% in the previous period. The y/y household credit growth declined from 26.6% in November 2013 to 9.8% in November 2014, while y/y business credit growth has increased from 2.8% to 12.3%.
“The increasing credit growth and arrears for businesses could be a reflection of the contraction of growth in the non-mining private sector, while contraction of credit growth to households could reflect the household income squeeze,” Sebabole noted.
The Rand Merchant Bank has forecast economic growth at 5.0% in 2015 with non-mining private sector continuing to underperform.
“This will be a challenge to banking operations as an economic-wide squeeze will reduce the financial intermediation activities, thus reducing the contribution of financial services to overall GDP. Erosion of purchasing power of households will also see minimal participation of households in boosting banks’ balance sheets” he said.
However analysts are of the view that, the challenges are prompting for unconventional means of banking which will result in customer-centric products. Innovation is also likely to increase as banks seek to retain customers and offer tailored structured products. “Increased competition will also encourage banks to deliver not only high-level service, but solution-based approach to banking,” said Sebabole.
At present the banking sector's total assets represent 50.4% of GDP. This is down from its 2009 peak of 60.9%. The Business Monitor International (BMI) forecasts client loans to grow by 12.0% in 2015, after an estimated expansion of 10.0% in 2014. This is markedly slower than the 18.4% average growth rate from 2009 to 2013.
This week Minister of Finance & Economic Development, Dr Thapelo Matsheka approached parliament seeking lawmakers approval of Government’s intention to increase bond program ceiling from the current P15 Billion to P30 billion.
“I stand to request this honorable house to authorize increase in bond issuance program from the current P15 billion to P30 billion,” Dr Matsheka said. He explained that due to the halt in economic growth occasioned by COVID-19 pandemic government had to revisit options for funding the national budget, particularly for the second half of the National Development Plan (NDP) 11.
Botswana Stock Exchange (BSE) has this week revealed a gloomy picture of diamond mining newcomer, Lucara, with its stock devaluated and its entire business affected by the COVID-19 pandemic.
A BSE survey for a period between 1st January to 31st August 2020 — recording the second half of the year, the third quarter of the year and five months of coronavirus in Botswana — shows that the Domestic Company Index (DCI) depreciated by 5.9 percent.
Botswana Diamond PLC, a diamond exploration company trading on both London Stock Exchange Alternative Investment Market (AIM) and Botswana Stock Exchange (BSE) on Monday unlocked value from its shares to raise capital for its ongoing exploration works in Botswana and South Africa.
A statement from the company this week reveals that the placing was with existing and new investors to raise £300,000 via the issue of 50,000,000 new ordinary shares at a placing price of 0.6p per Placing Share.
Each Placing Share, according to Botswana Diamond Executives has one warrant attached with the right to subscribe for one new ordinary share at 0.6p per new ordinary share for a period of two years from, 7th September 2020, being the date of the Placing Warrants issue.
In a statement Chairman of Botswana Diamonds, John Teeling explained that the funds raised will be used to fund ongoing exploration activities during the current year in Botswana and South Africa, and to provide additional working capital for the Company.
The company is currently drilling kimberlite M8 on the Marsfontein licence in South Africa and has generated further kimberlite targets which will be drilled on the adjacent Thorny River concession.
In Botswana, the funds will be focused on commercializing the KX36 project following the recent acquisition of Sekaka Diamonds from Petra Diamonds. This will include finalizing a work programme to upgrade the grades and diamond value of the kimberlite pipe as well as investigating innovative mining options.
Drilling is planned for the adjacent Sunland Minerals property and following further assessment of the comprehensive Sekaka database more drilling targets are likely. “This is a very active and exciting time for Botswana Diamonds. We are drilling the very promising M8 kimberlite at Marsfontein and further drilling is likely on targets identified on the adjacent Thorny River ground,” he said.
The company Board Chair further noted, “We have a number of active projects. The recently acquired KX36 diamond resource in the Kalahari offers great potential. While awaiting final approvals from the Botswana authorities some of the funds raised will be used to detail the works we will do to refine grade, size distribution and value per carat.”
In addition BOD said the Placing Shares will rank pari passu with the Company’s existing ordinary shares. Application will be made for the Placing Shares to be admitted to trading on AIM and it is expected that such admission will become effective on or around 23 September 2020.
Last month Botswana Diamond announced that it has entered into agreement with global miner Petra Diamonds to acquire the latter’s exploration assets in Botswana. Key to these assets, housed under Sekaka Diamonds, 100 % subsidiary of Petra is the KX36 Diamond discovery, a high grade ore Kimberlite pipe located in the CKGR, considered Botswana’s next diamond glory after the magnificent Orapa and prolific Jwaneng Mines.
The acquisition entailed two adjacent Prospecting Licences and a diamond processing plant. Sekaka has been Petra’s exploration vehicle in Botswana for year and holds three Prospecting Licenses in the Central Kalahari Game Reserve (Kalahari) PL169/2019, PL058/2007 and PL224/2007, which includes the high grade KX36 kimberlite pipe.