Banks profits for the first six months of the year are up 48% to record $100.59 million from $67.97 million recorded last year, numbers from RBZ’s Mid-Year Monetary Policy Review have shown.

Financial Matters with Tinashe Kaduwo

According to RBZ Governor John Mangudya, 18 out of 19 operating banking institutions recorded profits during the period ended 30 June 2017. Banks total assets have grown from $8.0 billion in June 2016 to $9.7 billion as at June 2017, representing a 20% growth. Deposits, although remaining skewed towards short-term and transitory in nature, have jumped by a massive 18% from the June 2016 level of $5.9 billion to $7.0 billion. Loans to the private have however fallen by 2% to $3.6 billion from $3.7 billion last year. Consequently, the loans to deposit ratio has fallen from last year’s 63% to the current 52%. A dearth in loans to the private sector is mainly a result of a steep fall in economic activity. Lack of quality borrowing clients and viable businesses have seen banks reducing their lending appetite despite enjoying a huge jump in deposits.

A loans to deposit ratio of 52% against the RBZ’s benchmark of 70%, indicates that the majority of deposits are lying idle despite the economy’s productive sectors being starve of viable credit. A combination of controlled lending rates, dearth in economic activity and Government’s heavy presence in the sector in terms of borrowings, has limited credit expansion to the private sector. According to Mangudya, “the Reserve Bank is pleased to advise that banking institutions have reduced lending interest rates and bank charges to promote provision of affordable banking services and access to credit. As at 30 June 2017, the average maximum effective lending rate was 11.94% compared to 15.7 % as at the end of December 2016.” Although plausible, the reduction in lending rates is mainly driven by regulation rather than market fundamentals, which in turn has contributed to a decline in credit expansion by banks. Interest rates caps have to some extent limited banks’ ability to fully price credit risk and therefore opting to invest in perceived risk free assets such as treasury bills. This effectively shuts out small private businesses from accessing loans and limits growth pace as the private sector should be at the core of economic activity.

Given a negative growth in lending activity by banks, it is evident that banks’ profitability is mainly driven by non-funded income, recoveries of written-off debts, cost optimisation and treasury bills discounting. The private sector's struggle to maintain positive rates of real GDP growth and a lack of cash circulating in the economy made treasury bills an attractive source of liquid and interest-paying assets for banks. Cash crisis brought new opportunities for the sector in the form of increased transactional volumes. Banks that have invested in sophisticated systems are enjoying a huge growth in their non-funded income line. The half year aggregated banks’ financial performance gives an indication of the sector ahead of publications of individual bank’s half year financial results. Income lines are generally expected to be skewed towards non-funded whilst most banks are expected to register a huge jump in total assets, deposits, exposure to Government and core capital. Individual banks are also likely to register encouraging progress in terms of non-performing loans as the sector’s NPLs ratio has fallen to 7.95% as at June 2017.

Despite banks recording encouraging progress in all key metrics, the figures do not accurately reflect the lack of liquidity in sector. Deposits, although showing strong levels of growth, very little is actually underwritten in hard cash, offering little support to funding. Capital adequacy now at 27% against a benchmark of 12% is also misleading as very little of the banks' capital structure is supported by reserves of hard cash, leaving the sector ill-prepared to meet current and unforeseen withdrawal demands from depositors. Furthermore, Government’s constrained fiscal position evidenced by last year’s deficit of $1.4 billion and treasury bills in circa of $2.5 billion leaves virtually no room for support of the sector. The sector generally faces significant risks despite expected encouraging financial performances.