Banks facing the crunch

Stricter liquidity controls that were announced by the Reserve Bank of Zimbabwe in January 2006 raising statutory reserves to 60 percent for demand deposits and 45 percent for savings deposits were reported to be sapping the sector of vital capital.

There were fears that some of the smaller and largely indigenous banks may go down but those in the industry said central bank governor Gideon Gono would not allow that.

Full cable:

Viewing cable 06HARARE731, GOZ POLICIES CRIPPLING BANKING SECTOR

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C O N F I D E N T I A L SECTION 01 OF 04 HARARE 000731

SIPDIS

SIPDIS

AF/S FOR B. NEULING

SENIOR AFRICA DIRECTOR C. COURVILLE

TREASURY FOR J. RALYEA AND B. CUSHMAN

COMMERCE FOR B. ERKUL

E.O. 12958: DECL: 06/19/2015

TAGS: ECON EFIN PGOV PREL ZI

SUBJECT: GOZ POLICIES CRIPPLING BANKING SECTOR

Classified By: Charge d’Affaires, a.i., Eric T. Schultz under Section 1

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Summary

——-

¶1. (SBU) Stricter liquidity controls implemented in January

by the Reserve Bank of Zimbabwe (RBZ) are sapping the banking

sector of vital capital at the same time as the industry

struggles to comply with higher capital requirements that

take effect later this year. This impending crunch has

fueled speculation that some smaller, indigenous banks may

fold. Foreign-owned banks will likely weather this storm,

mitigating the impact of this development. That said,

Zimbabwe’s rapidly shrinking economy is producing an even

greater long-term threat to the banking sector as banks

become dependent on government treasury bills and jettison

traditional banking functions. End Summary.

————————–

Tighter Liquidity Controls

————————–

¶2. (SBU) In a stated attempt to combat inflation, RBZ

Governor Gideon Gono last January announced tighter liquidity

controls. Statutory reserves for the banking sector were

increased to 60 percent for demand deposits and 45 percent

for saving deposits, up from the rates of 45 and 30 percent,

respectively. Statutory reserves do not earn interest and,

given the dominance of demand deposits, absorb about 58

percent of all banking sector deposits, according to

independent media accounts. At the same time, Gono announced

harsher provisions for settling nightly accounts to stimulate

interbank lending of excess funds. Funds held in excess of

the proscribed ratios would be automatically exchanged for

2-year government paper at a punitively low rate of 200

percent interest payable at expiry. Conversely, those banks

that find themselves short at the end of the day must borrow

from the RBZ’s accommodation window at 850 percent secured or

900 percent unsecured, payable the next day.

¶3. (SBU) In meetings with econoffs over the past few weeks,

financial sector insiders have universally condemned the

stricter liquidity controls. NMB Bank executive Lionel

Chinyamutangira noted that the maturities gap between

low-return assets and high-rate liabilities presented a major

challenge to funds managers, who now spend much of their day

pouring over cash flow data lest they be caught short.

Erratic government open market operations have compounded

this problem, according to Zimbabwe Allied Banking Group

(ZABG) Finance Director Priscilla Mutembwa, as one day the

money market can be flush with funds from the expiry of

treasury bills and the next day the market can be in a severe

deficit as the government moves to mop up spare cash.

¶4. (SBU) The sector’s inability to manage liquidity in this

harsh environment is causing banks that once earned profits,

at least in nominal terms, to begin to see red. John Legat,

the CEO of Imara Asset Management, estimates that this

failure to adequately manage funds has forced large banks to

borrow an estimated Z$1 trillion per day from the RBZ’s

accommodation window to cover nightly shortfalls. Mutembwa

noted that the losses to the sector peaked in about April and

that, while half year reports due out soon would probably

show continued nominal-term gains, the relative good times

that the sector enjoyed last year were gone.

HARARE 00000731 002 OF 004

—————————

Higher Capital Requirements

—————————

¶5. (SBU) According to FINHOLD principal economist Best

Doroh, liquidity controls were introduced at the worst

possible time, as the sector was also bracing for the higher

capital requirements that are due to come into effect later

this year. Doroh said that under new RBZ guidelines,

commercial banks would be required to maintain capital bases

of at least US$10 million. This requirement would be phased

in; by September banks would have to meet the target using an

exchange rate of Z$10,000 to the US$, or Z$100 billion. Then

in December, the capital requirement would be calculated

using the official interbank rate, which at a current rate of

Z$101,195 to US$1 equates to more than Z$1 trillion. Doroh

noted that as of last December four of the five largest banks

in Zimbabwe had more than Z$1 trillion in capital, but he

suspected that because of the stricter liquidity controls

many of them were now short.

—————————

Indigenous Banks Look Frail

—————————

¶6. (SBU) Indigenous banks in particular are scrambling to

raise enough capital to meet the December requirement and to

create a cushion should the RBZ devalue the official rate, as

currently expected, which in turn would hike the capital

requirements. Metropolitan Bank tops most lists of banks

expected to fold but, with only nine branches and few

deposits, the impact would be minor. Most local banks, such

as Kingdom and NMB, are planning rights issues to raise the

necessary funds. Local financial advisor Emma Fundira noted

that uncertainty in the local stock market would limit the

amount of capital that banks could raise domestically.

Investors, she said, would also surely question why Kingdom,

for instance, was embarking on a record-setting rights

issuance of Z$1.5 trillion only a year after its last rights

issue. For its part, the quasi-government owned ZABG was

seeking to raise Z$1.5-2 trillion through a fund at the

Finance Ministry, according to Mutembwa.

¶7. (SBU) Despite widespread speculation as to which banks

were likely to fold, banking sector insiders tell us that

most indigenous banks are likely to survive, albeit in some

cases by only a hair. Fundira expected that the GOZ was

likely to sever its ties to ZABG, which the RBZ formed in

2005 out of the forced consolidation of banks that failed in

¶2004. Without this backing, Fundira said ZABG could also go

under. Meanwhile, Fundira speculated that political ties to

Gono and other GOZ officials were likely to keep other

indigenous banks, such as CBZ, Premier, and Renaissance,

afloat.

—————————————-

Sector Looking to RBZ To Limit Contagion

—————————————-

¶8. (SBU) Bankers with whom we have spoken are confident that

the RBZ would successfully prevent possible problems at one

bank from impacting the wider financial sector. Recounting

the activist role of the RBZ since Gono’s appointment in

2003, Mutembwa and Standard Chartered executive Ralph

Watungwa separately said that the central bank would

intervene at the first sign of weakness. To this end, the

RBZ was monitoring capital requirements on a monthly basis

HARARE 00000731 003 OF 004

and regularly meeting with bank executives. Moreover,

Stanbic Managing Director Pindie Nyandoro told econoff that

the RBZ saw the negative impact of its stricter liquidity

controls on the banking sector and said that she expected

Gono to reduce the statutory reserves within the next week.

She speculated that the RBZ hiked statutory reserves as only

a temporary measure to present an improved balance sheet to

the IMF and to mop up excess liquidity earlier this year as

large amounts of treasury bills expired.

——————

Foreign Banks Safe

——————

¶9. (SBU) Financial contacts were uniform in their confidence

that larger, foreign banks would survive the stricter

liquidity and capital requirements. The foreign banks

largely view the new liquidity and capital requirements as a

hiccup in their operations and profitability. There is a

consensus, moreover, that despite these immediate problems

and the prolonged economic decline, Zimbabwe in the long-term

is simply too important of a market to be left out. Fundira

said that foreign banks recalled the difficulty of

penetrating the South African market and had drawn the

conclusion that the cost of pulling out and then reentering

Zimbabwe in the future would be prohibitive compared to the

cost of simply sustaining operations.

—————————-

Survivors Face A Grim Future

—————————-

¶10. (SBU) Although most banks seem likely to survive the

coming crunch, according to several industry insiders the

rapidly shrinking Zimbabwean economy has created a bigger

long-term challenge. According to these executives,

Zimbabwean banks no longer earn a profit on the traditional

banking functions of issuing loans and accepting deposits.

Profits instead are derived from returns on government paper,

reducing the once sophisticated banking sector to little more

than a discount house.

¶11. (SBU) Nyandoro noted that of Stanbic’s Z$20 trillion

assets, about Z$18 trillion was held in government paper.

While treasury bills offered a risk-free return, Nyandoro

said the GOZ’s continued issuance of debt was unsustainable

and that the government was now issuing paper simply to pay

the interest charges on expiring paper. Nyandoro and

Watungwa added that the banking sector’s problems were also

fueling a continuing emigration of skilled professionals.

Watungwa confided that he himself would be leaving Zimbabwe

next month to join Standard Chartered’s office in Boston.

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Comment

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¶12. (C) We agree with those industry insiders who see the

new capital requirements and tight liquidity controls as a

manageable crisis but who see the sectorQ,s growing

dependence on government debt as a real threat to its future.

Banks in Zimbabwe have become glorified bond traders that

earn profits, not from lending to productive sectors, but

from the government’s ever growing deficit. As a result the

sector will be poorly positioned to help turn around

ZimbabweQ,s economy when the time comes by mustering needed

capital and distributing it to productive enterprises.

HARARE 00000731 004 OF 004

SCHULTZ

(43 VIEWS)