Local banks draw lessons from the collapse of banks in the US, Europe
Absa doesn’t want to see what “we saw in Europe and other parts of the world”
Main risks relate to banks’ high concentration of lumpy short-term deposits – IMF
Fitch Solutions warns of high proportion of unsecured credit and wholesale deposits
FNBB says it is moving people from unsecured lending into sustainable lending
Banks report strong CAR
Absa Bank Botswana is sitting at 22% capital adequacy which market analysts contend is relatively high against the regulatory requirement of 12.5%. But the lender’s Managing Director (MD), Keabetswe Pheko-Moshagane argued that this is a level she believes is optimal and efficient because “we still see strong headwinds”.
Responding to questions from Imara capital’s Mogorosi Badisang, Pheko-Moshagane insisted that the environment remains uncertain and she does not want to see what she saw in Europe and other parts of the world.
Global Banks Failure
This all began around 10 March with the collapse of Silicon Valley Bank. A week on, CNN reported that a second US regional bank — Signature Bank — had “been shut down, a third — First Republic Bank (FRC) — has been propped up, and the first major threat since 2008 to a bank of global financial significance — Credit Suisse — has been averted after it was taken over by UBS”.
The reports attributed the crisis to aggressive interest rate hikes by the US Federal Reserve, which triggered losses on the portfolios of government bonds held by US banks. Calm was restored through the injection of huge sums of emergency cash from the central banks and some of the industry’s players, mainstream media narrated. First National Bank Botswana’s (FNBB) baseline view assumes that the global banking system is sufficiently well capitalised to prevent a financial crisis, and central banks are likely to provide ongoing liquidity support to the financial sector to limit the risk that rate rises translate into systemic financial problems.
Absa cautious
It is against this background that Pheko-Moshagane said Absa “continues to be cautious ahead of the regulatory threshold in terms of capital adequacy”. Badisang had asked whether the bank is comfortable sitting at a high level and if Absa has plans to deploy some of the capital it is hoarding. “We are sitting in a very efficient threshold until we reach a time we see that the uncertainty that we are operating on is starting to taper down.”
Main risks relating to banks
In a recently released report, the International Monetary Fund (IMF) found that while the financial sector in Botswana appears broadly stable, sound and resilient, the main risks relate to banks’ high concentration of lumpy short-term deposits from retirement funds and insurance companies, volatility in diamond prices, geo-political developments, and the tightening of global financial conditions.
“Under a severe risk scenario, two banks fell below the prescribed capital ratio,” IMF wrote in a report titled ‘Botswana Financial System Stability Assessment’. “The elevated level of banking sector liquidity allows most banks to withstand liquidity shocks,” IMF said adding that most banks are expected to meet the prescribed liquidity ratios under a baseline scenario. “However, some show vulnerabilities when subjected to an adverse scenario.”
Volatile unsecured credit & wholesale deposits
In its August article, Fitch Solutions warned that banks in Botswana have a high proportion of unsecured credit and wholesale deposits, both of which are more volatile in nature. IMF study shows that total deposits of Non-Bank Financial Institutions (NBFI) in the banking sector account for 23% of deposits and comprise sizeable deposits from a few large depositors.
IMF found that the largest banks hold close to 68% of total household and corporate call and savings deposits, leaving smaller banks to rely largely on price-sensitive fixed deposits or access interbank funding from larger banks. To strengthen the funding liquidity of banks, the IMF said it is advisable to transition to the Basel III framework for liquidity monitoring and enhance the development of money and bond markets.
A high proportion of unsecured loans
On the liabilities front, the IMF found that loans are concentrated in the household sector (41% of commercial bank assets), followed by the non-financial corporate (real) sector. Bank loans to households are largely personal loans (70 percent), mainly in the form of unsecured consumer credit.
“If you look at the Botswana market, it is still largely driven by households. It is a very risky portfolio,” Pheko-Moshagane said of unsecured loans. But then again, the MD of the country’s second-largest bank maintained that what influences their strategy as Absa is the mitigating strategies that they deploy. “We cannot shy away from household debt because it’s risky but we need to continuously be innovative on the strategies we deploy to de-risk that loan book,” she argued. At the First National Bank Botswana (FNBB), CFO Dr. Mbako Mbo reported that the bank saw marginal growth in its mortgage book which is something “we will focus on as we try to move people from unsecured lending into sustainable lending particularly in homeownership space”.
NPLs could trigger capital shortfall
IMF warned that risks could arise due to a homogenous structure of concentrated exposures to household loans. “Assuming 20 percent of household performing loans transit into non-performing loans, some banks would encounter a significant capital shortfall, resulting in the aggregated Capital Adequacy Ratio (CAR) falling below minimum capital requirements.” Nevertheless, the lender noted that the majority of the banks possess robust total capital buffers and would remain unaffected by severe shocks to household loans.
Banks’ capital positions
FNBB, the most profitable bank in the country closed its 2023 full with a P3.7 billion position. The bank said the Capital and Liquidity positions are at levels in line with thresholds set by the Board, and optimally ahead of regulatory prescripts. “This positions the bank for uninterrupted and sustainable growth into the future,” FNBB wrote in its financials.
Elsewhere, Standard Chartered Bank Botswana’s Capital Adequacy Ratio (CAR) stood at 17.1% as at 30 June 2023. As such, CFO Tapiwa Butale said no capital concerns are anticipated into the full year 2023. Access Bank’s CAR was at 21.2% as at 30 June 2023, compared to 20% as at 30 June 2022. In its results for the half year ended 30 June 2023, Acting MD Musonda Chishimba said the strong capital levels position the Bank well for future growth as investment into transforming the bank is key to unlocking growth.
At BBS, despite the negative performance recorded during the half year ended 30 June 2023, the Group said it continues to maintain a robust capital position, with a capital adequacy ratio of 22.32% (December 2022: 26.56%). “This ensures our ability to meet regulatory requirements while supporting our transformation ambitions,” Pedzani Tafa, the MD of the indigenous bank said. Stanbic Bank in its 2022 annual report said it closed the year with a strong capital base, recording a CAR of 19.24% compared to 17.34% in 2021.
Realeboga Phoi, the Chief Finance and Value Management Officer explained that the 2022 financial performance also improved the capital position, driven by the growth in profit. The Bank’s profit before taxes grew by 111%, from P281 million to P594 million, owing to technological advances as well as the use of data insights.
Asset Quality
The latest stress tests for banks found that the sector is resilient. But Fitch warned that banks would suffer considerable falls in capital if loan quality significantly deteriorates.
During the presentation of the recent results, FNBB’s Dr Mbo told a gathering that 95% of the bank’s assets are stage 1 and stage 2. “Basically meaning that 95% of our book is performing and 5% is not performing,” Dr Mbo said quickly adding that management is not worried about the 5% given that this is at the lower range of the industry average.
At BBS, the Group reported an impairment charge amounting to P6,089 million for the interim year ended 30 June 2023, compared to P1.766 million in the same period in the previous year. Tafa, the MD of the bank said this is attributed to the loan book growth, new unsecured personal loans and an increase in stage 3 loans, reflecting the current economic hardships suffered by consumers and downsising across various industries. “Net unsecured loans and advances stood at P33.0 million as at the reporting period compared to P0.927 million as at the first month of rollout, 31 March 2023.”
At Stanbic, management has been investing a lot of resources in training its people on risk management policies and practices to improve risk management strategies. Coupled with predictive data analytics, which improve the ability to identify potential distress in clients’ behaviour, Phoi said the Bank saw an improvement in its customers’ credit profiles, as well as being able to manage impairments ahead of events.
These efforts saw well-managed impairments in 2022. The Bank has also through its Rehabilitation and Recoveries (R&R) unit, been able to claw back P98 million through its insurance indemnity cover for an impairment raised in 2021. “As a result, the Bank posted a net credit recovery of P12 million compared to an expense of P209 million in the prior year, Phoi said adding that “the prior year impairment charge included a once-off incident of P94 million”.
For Stanchart credit impairment normalised to P31 million and Butale said the portfolio remains resilient with a lower loan loss ratio.
Assets vs Liabilities
IMF found that over 65 percent of bank assets are floating rate, while approximately 35 percent of liabilities are fixed rate and are subject to administered rates that typically lag policy rate changes. Bank assets also have significantly shorter maturities than liabilities. However, in an environment of rising interest rates, the IMF said banks may experience a spike in net interest income (NII) and positive interest rate risks in the banking book (IRRBB) exposures.
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