In the past year, First National Bank of Botswana (FNBB) has been taking a cautious approach to lending, owing to disruptions caused by the scourge of COVID-19. In the last six months of 2020, loans and advances declined by 3.87 percent to P14.1 billion (FY 20: P 14.7 billion).
Credit quality deteriorated with FNBB’s cost of risk increasing to 2.99 percent (H1 20: 1.79 percent), well above the aggregate consumer banks’ 1.36 percent. This justifies its prudent lending approach, says Kaone Kebonang, Research Analyst at Imara Capital. “This trend is expected to continue with economic activity remaining subdued and will only begin to improve as the economy recovers,” Kebonang says, adding that the recovery is however highly dependent on the rollout of COVID-19 vaccines which will allow economic activity to resume to pre-COVID levels.
However, even before the COVID-19 outbreak, the lending environment was still troubled. Over the years, the bank rate has come down to lows of 3.75 percent, squeezing margins of banks. In light of economic conditions, which reflected low consumer spending levels, low inflation rates (which recently spiked due to increases in taxes and levies) and a historically low bank rate, the bank’s margins continue to be under pressure, Kebonang observes.
In its results for the six months ended 31 December 2020, the bank’s economists had cautioned that the Monetary Policy Rate would remain accommodative, with a further reduction to 3.5 percent during 2021 and that the demand side will remain subdued this year with diminished economic activity causing unemployment challenges and pressures on disposable income.
The opportunity for growth in interest income, even globally, is getting thinner and thinner, evidenced by the decline in profitability of banks owing to record low interest rates coupled with limited opportunities. As this happens, exacerbated by the impact of COVID-19, FNBB resorted to park some deposits, which are now outrunning credit growth in investment securities. “In an environment of low credit growth in the market as a whole, and in order to ensure prudent liquidity management, excess liquidity was placed in investment securities,” Steven Bogatsu, CEO of the bank, wrote in the results for the six months ending 31 December 2020. “This positions the bank well for productive credit growth opportunities in the future.”
FNBB registered a 16.09 percent year-on-year (y-o-y) decline in net interest income before impairment charges to P 577.4 million (H1 20: P 688.1 million). The result was on the back of a 15.26 percent y-o-y decrease in interest income to P713.4 million (H1 20: P 841.9 million). This was influenced by an 11.25 percent y-o-y decline in advances to customers to P 14.1 billion (H1 20: P 15.9 billion) as well as a cumulative 100 bps cut in the bank rate during the period under review.
Kebonang says FNBB is somewhat shielded from the challenging lending and interest rate environment due to a high percentage of its revenues originating from non-funded streams. During the period, she observes that the bank’s non-interest income as a percentage of total income from operations increased to 52.53 percent (H1 20: 49.19 percent), which is significantly higher than its regional peer average of 37.79 percent. “Moreover, non-interest income covered operating expenses 1.08 times, highlighting the bank’s strong diversity in revenue generation,” Kebonang says. “Therefore, any potential downside risk from the accommodative monetary policy will be cushioned by the bank’s widely available non-funded services through a combination of its digital solutions; nationwide branch network, ATMs and vast POS machinery.”
While non-interest revenue (NIR) decreased 4 percent year-on-year following a decrease in foreign income revenue, other core revenue lines remained resilient. Transactional NIR was mainly driven by service-related revenue increasing by 16 percent. This was in turn supported by both an increase of 9 percent in the customer base and an annual rise of 2.8 percent in the tariff. An additional 795 Point-of-Sale (POS) devices resulted in commission income growth of 5 percent, notwithstanding card transaction volumes remaining flat. The total number of POS devices in use exceeds 10,000. Kebonang says the bank’s non-interest income to costs cover of 1.08x (H1 20: 1.06x) highlighted the bank’s diverse income generations streams.
As Stockbrokers Botswana observed, the sector continues to increasingly embrace technology with the rollout of digital products and increased volumes of digital transactions as competition intensifies. Banks had been investing in the refurbishment and relocation of their branch networks amidst this “bricks to clicks” phenomenon, especially FNBB. While FNBB increased branches, they made them small from between 800-1000 sqm to between 400-500 sqm, demonstrating intent to lower cost of business, which is paid with non-interest income. “That is why we are reducing costs given the declining revenue due to migration,” Bogatsu said back in 2018.
The bank has been slowly steering clear of the traditional way of assisting clients at branch points, one of the ways the bank admits was a high revenue driver compared to the convenience of using technology at any point. More revenue was earned from transactions carried out at branch points than the modern likes of e-wallet. “Non interest incomes revenue increases on transactions done through branches,” Bogatsu said in 2018. At that time he was worried that migrating the bank’s processes from the traditional way of transacting at branches to the technologically modernised ways would have an impact on non-interest income.
FNBB embarked on an exercise to review and re-engineer the operational model, processes and staffing model as part of its automation. The process of the re-engineering project was motivated by the need to revitalise operating strategies for improved customer experience and business performance. Analysts argued that in the long-term, migrating from bricks to clicks was ideal as things are done in-house now. The world has been also moving to technology to remain relevant.
It was therefore justified for FNBB to forgo the revenue derived from branches. Had they not acted, observers argued that it was going to blow on their faces because there was no guarantee that the thousands of their customers would have stuck with them, given the growing competition.
Since introducing other non-funded revenue streams, FNBB has been very aggressive with promotional campaigns to encourage customers to make less use of branches and greater use of the lower-priced electronic options, with a view to providing customers with greater convenience, more especially in the advent of COVID-19 as the bank tries to reduce circulation of cash.
“The bank’s forward-thinking approach to technology and innovation will remain a core priority,” Bogatsu says, adding that the FNB App, online banking and POS infrastructure have remained stable over the period. “Growth in registrations and usage continues across all digital platforms, with customers appreciating the ease of transactability on these platforms and being empowered to serve themselves in the form of convenient, value-added services with minimum added exposure to COVID-19.”
The CEO says FNBB’s investment in customer-centric solutions will carry on improving its operational processes, as will continued investment in developing use of technology and automation. “Innovative solutioning will remain central to the bank’s continued success and particularly so given the acceleration in the current rate of technological change.”