Absa Bank Botswana’s customer deposits registered a “pleasing” momentum, growing 15 percent to reach P16 billion during the first half of 2021. The growth came mainly from the retail and corporate space, which is in line with what the market has witnessed.
“We have been seeing that from last year to this year,” said Salma Baduel, Acting Country Treasurer. “Those books continue to be the largest contributor to liquidity. Even if you look at the statistics, they actually remain growing.”
With respect to the quality of such deposits, Baduel said he expects them to be sticky. Stick deposits are deposits that people usually keep for long periods without touching. The cheapest and most stable source of funding for banks comes from these. Savings accounts and fixed deposits that keep being renewed are examples.
But as deposits performed well, interest expense did not keep track of the trend and pace of growth of the deposits, almost remaining flat. The banks’ officials disclosed that this was influenced by interest rates being at their lowest combined with excess liquidity. Absa’s regulatory capital position stood at P2.9 billion, representing a capital adequacy ratio of 18.6 percent against the 12.5 percent regulatory limit. Liquid assets ratio stood at 14.6 percent, well above a regulatory limit of 10 percent.
Accordingly, the bank did not have to pay clients that much for deposits, reflected by interest expense only growing by a little 2 percent partly due to liquidity mop which pushed cost of funding up. In an ideal world, interest expense would have kept pace with the 15 percent growth of deposits
There are three main factors that influenced lagging cost of funding, according to Baduel. These are market liquidity, which has remained fairly stable, the policy rate and how that translates into the bank’s deposit pricing. “We do have a portion of our book, between 40 to 60 percent, which is susceptible to changes in the policy rate,” Baduel responded to a question raised by Kaone Kebonang, Research Head at Imara Capital.
The analyst was quizzing about the rate sensitivity of deposits and to what extent it has impact, if any.
While that was obviously a good contributor to why interest expense actually did not grow to the extent of deposit growth, “we do see that once there is changes in the policy rate though, that portion of the book can reprice”, said Baduel.
The third factor that Baduel thinks was not much of a mover is what has been happening in the government bond space. “We have seen that that curve has slightly ticked up but that was more towards the second half of the year,” she said. “We don’t expect that to actually have been filtering through to the cost of funding”.
The bank has been holding adequate levels for over three years, with capital adequacy ratio above both internal and the regulator threshold. Absa views its current levels as more of a constant position in the medium term, taking into account the corporate business.
The bank still continues to see corporate clients taking a hold-and-wait type of strategy; businesses are not executing on any of their big strategic initiatives that could lead to significant spend. As such, Absa ends up with a bit of sticky deposit situation in the corporate segment.
On retail deposits, the bank said there is often movement as retail customers’ behaviour vary. “It’s very seasonal depending on where we are. As we are approaching year end, you would see utilization of those is going up,” the bank’s MD Keabetswe Pheko-Moshagane adds.
Key indicators shows that there is liquidity in the market. Absa managements observed liquidity of about 1:1.5 billion for this year. Surplus position in the market is still averaging about P8 billion as customer deposits are still growing in the market. The bank said this indicates that there is liquidity in the market. For the rest of the year, it is generally observed that there tends to be tightening due to seasonality.
The only thing that Absa could mention as maybe risk to liquidity is if the government bonds are issued and the funds are not yet brought into the market hence a bit of a lag between funds leaving and funds coming in. However, Absa said it has been getting the comfort from government that they don’t expect there to be a lag in terms of liquidity.
Management said capital management still remains a key strategic area focus to ensure that the bank is adequately capitalised and has returns that cover cost of equity.
Due to the impact of the COVID-19 on businesses, Absa recognized the efforts of the central bank to support banks and had revised that requirements down from 15 percent to 12.5 percent last year.
Leroy Klein Absa’s Chief Risk Officer believes it’s important that they are ready to support the government in the initiative to grow the GDP in the short to medium term. “That will be facilitated by the 12.5 percent, it gives us ample room to play GDP role as all banks are supposed to,” he said respond to a question from Kgori Capital’s Antwi Kwabena seeking to gather the bank’s view on regulatory limit going forward.
In terms of the internal limit, he said it will change year on year depending on the structure of the bank’s risk and profile of capital.