The underperformance of the banking sector will force struggling financial institutions to look offshore for support to satisfy prescribed capital requirements and rising bad loans, a local brokerage and advisory firm has said.
In its half-year banking sector analysis for this year, MMC Capital said low disposable incomes on the back of companies scaling down operations and closures would result in a constrained growth in deposits.
The Reserve Bank of Zimbabwe this year introduced a three tier system for banks which will see Tier 1 banks having to meet minimum capital requirements of $100 million by 2020.
MMC noted that the industry’s loan-to-deposit ratio (LDR) as at the 30th of June 2014 was 83.3 percent, showing less lending aggression than the prior year, which was at 95.5 percent. From the reporting banks, the LDR declined from 77 percent to 71 percent.
The disparity in the industry’s LDR versus the reporting banks’ LDR shows that there was a great deal of lending by the non-reporting banks, MMC said. The decline in the LDR in the half year ended 30 June 2014 however indicates that banks are now reducing their appetite for lending, most explicably on the basis of the surge in NPLs.
“The industry’s positive profitability remains under pressure given the increasing level of NPLs. Banks’ capacity to continue to drive down CIR from reducing costs now seems constrained, evidenced by the rise in Cost to Income Ratio to 75 percent in the period under review relative to 72 percent in 2012 – pointing to the need for innovation to increase revenue streams,” said MMC in the report.
“In our view, the increased capital requirements as a result of the RBZ directive may lead to a number of banking institutions failing to meet capital requirements. Local banks will likely concentrate more on seeking international partners in a bid to meet the capital thresholds as well as securing channels for cheaper credit lines.”
The report covers 17 financial institutions which include: 13 commercial banks; three mortgage lenders and a savings bank.
MMC said the country’s economic growth remains inhibited by challenges stemming from the large external debt burden and high unemployment, estimated at over 80 percent, and driven by high industrial capacity underutilisation.
“Under the traditional banking business model, net interest revenue is the largest source of income. This, however, is not the situation in Zimbabwe where non-interest income makes up a significant portion of most banks’ income,” the report showed
“The industry’s average fraction of interest income to total income remained at 49 percent compared to last. The ratio has been on an upward trajectory since 2009, 29 percent in 2009, 34.2 percent in 2010 and then 46 percent in 2011.”
Sources of noninterest income components include deposit and transaction fees, insufficient funds fees, annual fees, monthly account service charges, inactivity fees deposit slip fees.
Allied Bank, along with Metbank, AfrAsia and Tetrad – is one of the four banks cited by the Reserve Bank of Zimbabwe as being in distress. The banks are facing liquidity and solvency challenges due to macro and institution specific factors.- The Source