When a wage bill is reduced, anticipation of impact on jobs is made. Managing Director (MD) of Absa Bank Botswana Limited, Keabetswe Pheko-Moshagane, responded to this publication on Wednesday lastweek through a Question and Answer session. The group was presenting its full year results ended 31 December 2021 where The Business Weekly & Review sought to establish the impact of rationalisation on the bank.
This is in light of finance minister Peggy Serame’s announcement during the budget speech in February. As part of the government’s rationalisation plan, Serame said they will identify where public sector employment can be restructured and identify possible savings in the wage and salary bill. This will directly address the problem of the ever-growing wage bill, which the minister revealed was estimated at over 16 percent of GDP in 2020/2021, compared to the acceptable 10 percent recorded by comparator nations. The benefits of this initiative will start to be realised in the coming financial year, said the minister, who noted that since the Directorate of Public Service Management (DPSM) is taking a long-term approach to the initiative, and given the transitions required, the project is envisaged to run over a period of three years for effective implementation.
The Workforce Planning System, which is being developed by DPSM through the Botswana Public Service Workforce Strategy and the Workforce Plans Project, started in July 2021. In addition to promoting workforce flexibility and improving productivity in the public sector, the key objective of this project is to manage the “government wage bill”.
Responding to this publication, Pheko-Moshagane points to key aspects which make part of the bank’s strategy as a hedging tool. “Two years after successful launch of our new brand and taking into considering the market context, it was important to refresh our strategy,” the MD said. The Group and Absa Bank Botswana strategy still re-anchors its 2018 strategy with the purpose of being a leading African bank “bringing possibilities to life”.
This resulted in the five key strategic pillars that will shape the bank’s direction forging ahead. Pheko-Moshagane explained: “First, building a winning and talented diverse team through distributed leadership.” Secondly, she said, the bank aims to be the primary banker of its clients across all segments. “Thirdly, we will be deliberate about our revenue growth and diversification,” she continued, noting the fourth pillar being that of driving digitally-powered business with end to end consistent and seamless experience for its clients and employees. The last pillar the bank hinges on is a focus on being “an active force for good in everything that we do”, with an emphasis on Environmental, Social and Governance – ESG.
Pheko-Moshagane emphasised that the strategy gives “us a leeway to pull different levers” to soften any negative impact that the business may be facing. As the government forges forward with its strategy, and if the reduction in the salary bill results in a negative impact, she envisages the bank being able to pull their strategic pillars to cushion the impact. A key metric that she touts is the improved credit loss. For the year ended 31 December 2021, expected credit losses materially recovered by 70 percent to close the year at a total charge of P79 million.
Significant increases in credit risk and performance of macro-economic variables were key contributors to the prudent approach that the bank took last year, finance director, Cynthia Morapedi explained. She added that this approach provided a solid base and cover from a credit risk perspective and that the relief measures granted to customers last year did not only provide support during a very difficult time but they also provided a solid base on which recovery emerged. The current performance in the bank’s impairments is owing to the stability in its portfolios and prudent portfolio management across all segments, proactive management of emerging risks, as Morapedi said the bank did last year, “and a positive outturn in our macro-economic factors”.
The credit loss “cements our prudent approach which is a very solid strategy in terms of how we assess and manage our credit risk,” Pheko-Moshagane noted. She therefore believes that the bank has various ways and initiatives that would equally cushion the business if the impact from the wage bill move leads to a direction that is negative. For instance, she singled out retrenchment covers as some of the credit lines that would cushion that effect. The Minister of Employment, Labour Productivity and Skills Development, Machana Shamukuni, revealed in Parliament this week that 457 companies had submitted notifications of intent to retrench. “Since the outbreak of COVID-19, 344 Batswana were retrenched between April 2020 and February 2022,” the minister said. “However, the number is expected to increase after 457 companies submitted notifications of intent to retrench to the ministry. The additional 457 number of companies also raised the effects of COVID-19 as the reason to downsize the staff.”
Absa previously downplayed fears of the impact of such job losses on its loan book, citing the low risk profile of its customers. With the government going ahead with its plan, the bank had said its retail lending book is dominated by government schemes. A key point to note is that in addition to the ongoing process of rationalisation and restructuring of SOEs, the government will reduce the size of subventions to commercial SOEs and its revenue support grants to local authorities.
In addition to these, the country’s monetary policy will undergo a major overhaul, with the Bank of Botswana (BoB) announcing plans to make operational changes recently. These changes are aimed at improving the effectiveness of the transmission mechanism and BoB’s ability to influence monetary conditions. Some banks have raised fears that the changes may impact on their balance sheet, although the impact is yet to be quantified. The impact is expected to be from the cap imposed on the Prime Lending Rate (PLR) against the dynamics of cost of funding. Said Morapedi: “We are expecting this to have an impact but we currently are still working with the current prime rate as set by Bank of Botswana . BoB is consulting stakeholders in this regard in terms of how these reforms will be implemented.”
Even so, Pheko-Moshagane, finds comfort in Absa’s important pillar of revenue diversification. “We will continue as Absa Bank Botswana to balance our primary purpose, which is to pride lending in a market and employing non-funded income in response,” she said. The bank’s strategic intent to drive fee income has paid off with net fee and commission income growing by 14 percent propelled by Absa Bank’s digital drive and adoption coupled with the momentum on transaction volumes during the year under review. “The strategy or the points I have just explained should cushion us very well as a business,” said Pheko-Moshagane, adding that the strategy pillars will be underpinned by leveraging investment in technology and embedment of its brand as key enablers.
With these strategic pillars, the MD presented the 2022 outlook thus: “We expect our revenue to grow at higher single digits and anticipate net interest income to continue being under pressure in the short- to medium-term.” Aggregated, the bank’s total revenue grew by 5 percent year-on-year primarily out of the momentum in non-funded income which grew double digit on account of recovery of economic activities in 2021. Net interest income remained subdued and receded 1 percent in comparison to the previous year out of the challenges seen from a funding perspective.
In 2022, Pheko-Moshagane said operating expenses should grow in line with inflation, resulting in a slightly positive income statement JAWS. Compared to last year, costs have reduced by 4 percent. Pheko-Moshagane also expects credit loss ratio to remain high but on a declining trend as the bank observes the recovery of sectors that were highly impacted by the pandemic. “Consequently, we expect ROE (Return on Equity) to continue to improve,” she noted. Return on Equity improved from 13 percent in 2020 to 20 percent in 2021. Capital adequacy ratio is also expected to remain above regulatory and internal limits. Capital and liquidity ratio ended the year well above both internal limits as well as regulatory limits of 12.5 percent and 10 percent respectively.
“As Absa Bank Botswana we are confident in our solid strategy road map to navigate these headwinds and continue to bring possibilities to lives for our clients, customers, employees and most importantly to drive an active force for good in everything we do,” Pheko-Moshagane emphasised.