FUNDED income in the banking sector has taken a knock from declining interest and high default rates in the private sector, a local equities group has said.

In an economic outlook released recently, Equity Axis (Equity) noted that trends in the banking sector ― which recorded income of $1,1 billion in the full year to December 31, 2017, an increase of 13 percent on the previous year ― showed a sustained upsurge in transactional business which in turn had overlapped the impact of partial funded income slowdown to drive overall incomes up.

“Funded income is hamstrung by declining interest rates and high default risk in private sector lending.

“Sovereign paper remains the preferred interest earning asset and a slowdown in TB issuance may lower income from net interest income,” Equity said, adding this had left banks heavily reliant on non-funded income.

While money supply stood at $7,8 billion as at February – which is an exorbitant year on year growth of 36 percent – transferable deposits had been the force behind the growth having spiked by 47 percent over the same period.

“As a result, domestic credit went up by 38,5 percent to $10,5 billion between February 2017 and February 2018.

“Credit growth was largely stimulated by a growth of $2,3 billion in credit extended to government from $3,9 billion to $6,8 billion as at February,” Equity said.

Non-funded income at $550 million accounted for close to half of the sector’s total earnings in 2017, a trend which points to a growing over-reliance on non-interest income.

According to IH Securities (IH), non-funded income’s contribution to total income rose from 53 percent in 2016 to 57 percent last year.

“This therefore highlighted how crucial this source of income has become for the banks again after the contribution had started coming off from FY12,” IH said recently.

The market has seen a trend of diversifying income streams within the sector with banks like CBZ, FBC and ZB Bank growing their insurance footprint, while most banks have started making moves to grow digitally as the brick and mortar model of banking becomes redundant.

As the economy continues to become informal, banks have also started targeting this sector as this is where most of the transactional volumes take place.

“Unlike past years where transactional charges were high and lending was low and in turn non-funded income was high, banks have recently started making a deliberate effort to grow non-funded income as it is the source of income that is easily accessible with the current environment,” IH added.