Banking sector battles COVID-19 challenges

• Growth and net interest margins are set to remain under pressure as policy interest rates remain low
• Borrowing has increased with reduced deposits due to increased unemployment and closure of businesses

“The Monetary Policy Committee has since cut the bank rate to 3.75 percent in the meeting that was held on the 8^th of October 2020 and has maintained the bank rate at 3.75 percent thereafter against the backdrop of inflationary pressures that have seen inflation rise above the bank’s objective range of 3 percent-6 percent,” the reports says.

“There has been dampened business sentiments that led to the closure of some SMEs and other firms, resulting in increased unemployment. Consequently, borrowing has increased coupled with reduced deposits. Furthermore, unemployment is anticipated as uncertainties brought about by the Omicron variant resurface. The banks’ top line growth and net interest margins are set to remain under pressure as policy interest rates remain low and customers shift to term deposits in pursuit of more favorable interest rates.”

The banking sector is anticipated to fixate focus on high yielding loan book growth and to pursue deposit mix optimisation with the intention of realising net interest income growth as they expand their non-interest revenue bases. “Credit growth may increase in line with improved economic prospects as businesses and households cement their optimism from end of the SOE, vaccinations and improved macro-economic environment,” the report said.

According to SBB, the largest bank in the country, First National Bank Botswana (FNBB), will remain stable in the ensuing year with an increased self-help services focus across their digital platforms and monetary policies are expected to maintain a dovish stance. This means pressure will be felt on the bank’s top line growth as low policy rates affect profitability.

According to the report, FNBB can be expected to be aggressive with their digitalisation advancement in order to further enhance innovation as competition tightens in the banking digitalisation space. “Focus will remain sharp on improving the non-interest revenue base,” it says. “Competitive pressures were felt on the retail segment of the bank as retail advances experienced a sharp decline of 7 percent, while Botswana retail market increased by 9 percent. This has been on the back of a mix of enhanced competition and the bank’s selective retail exposure approach. The bank maintained a cautious lending risk appetite during the reporting period.”

Absa is said to have shown a positive performance in its impairments line and yielding cost control metrics, translating to a 125 percent increase in profit before tax. Its net interest margins were squeezed due to low interest rates. However, the bank’s continued efforts of rolling out digital solutions to its clients has seen the counter experience increased sales and transactional volumes edging towards the pre-COVID levels and consequently fee revenue significantly increased.

“The bank intends to register robust cost containment measures leveraging on a leaner, rotational and digitally-led operating model,” says the report. “Considering that the rebranding exercise has been concluded, more efforts will be made towards the rollout of digital solutions to its customers.” StanChart has recovered to post resilient interims on the back of well managed risks and increased returns. Its Consumer, Private and Business Banking segment has introduced the 4^th ‘Digital Only’ smart branch, the Express Banking Centre (EBC) in Lobatse, and Bank2Wallet incentive in partnership with Mascom with more payment solutions in its pipeline. The rollout of these self-service functionalities bode well for the bank, given the tightened competition across the banking sector. StanChart is positioned well relative to other banks sitting at a PE ratio of 31.9x as at 07th January 2022.

The recently acquired BancABC, now trading as Access Bank, is set to use synergies from Access Bank Plc’s expertise in banking to position itself as a formidable competitor. Notwithstanding the prevailing economic environment characterised by low interest rates and stiff competition across digital platforms, Access Bank is positioned to succeed in this environment, given its diverse global footprint.