Risks loom over the horizon for the banking sector

Whereas Absa Bank Botswana has delivered solid financial results for the half-year 2022, the financial institution is cognisant of the risks that lie ahead. For the half-year ended 30 June 2022, the bank recorded profit before tax of P395 million, a 36 percent increase from the same period last year. Absa’s profitability was mainly driven by an 8 percent increase in net interest income, together with a 72 percent reduction in credit losses, a 42 percent increase in trading income, and a 7 percent increase in net fee and commission income. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="3" ] The bank’s Finance Director, Cynthia Morapedi, said what is pleasing about the profitability for this period is that all material lines of Absa’s income statement continue to contribute to the improvement, which is key to the sustainability of the bank’s performance in the long term. “Additionally, the profitability growth is holistic, with improved returns noted across the Corporate Investment Banking (CIB) and Retail Business Banking (RBB) businesses,” said Morapedi. For the period under review, Absa registered a total of P881 million as revenue, reflecting an 11 percent growth. “Focusing on revenue mix, our net interest income grew 8 percent in aggregate compared to the previous year on account of strong balance sheet momentum,” Morapedi said. “Gross interest income remained upbeat, ending the period with a 13 percent improvement. However, cost of funding increased substantially by 30 percent year-on-year.” According to the bank’s Finance Director, Absa has seen a sprout in the cost of the funding curve which Morapedi said speaks to challenges in the trading environment. “Despite this growth, net interest income ended the period above what it was in the prior year.” An improvement in transactional volumes resulted in an increase of 16 percent year-on-year for fee and commission lines. Gross fee and commission income grew 23 percent with net trading income up 42 percent year on year. Morapedi noted that this performance is commendable, given the challenged and disrupted economic and trading environment that the bank had to navigate in 2022. For impairments, Morapedi revealed that expected credit losses continue to improve as a result of the prudent approach Absa took in previous years. For the period ended 30 June 2022, she said credit losses materially recovered by 72 percent, closing the period at a total charge of P13 million. “This current performance in our impairments is owing to portfolio stability and prudent risk management across all segments as well as robust credit modelling,” Morapedi said. “Consequently, our loan loss ratio has improved to 0.16 percent in the current period, and we still maintain adequate levels of provision to absorb future shocks.” At P473 million, Morapedi said operating costs remain well contained and have increased by only 3 percent year-on-year, which is below average inflation. This, she explained, was achieved through prudent cost management strategies together with leveraging the benefits of digital investments. “This resulted in our cost-to-income ratio improving to 54 percent, which compares favourably to 58 percent we had in the previous period,” she revealed,” Morapedi said. “The bank still shows notable positive income statement jaws of 7.4 percent, which has improved from 6 percent in the prior period.” She noted that Absa’s balance sheet maintained stability, continuing above the P21 billion mark as reported in the previous period, driven mainly by customer loans and deposits. Customer loans have increased in excess of P781 million, and according to the Finance Director, this was primarily due to the momentum in the RBB franchise together with the growth in the CIB franchise year-on-year. Customer loans and advances have grown by 5 percent compared to the previous period. “Our customer deposits showed muted performance half-year on half-year mostly due to the challenging economic conditions prevailing,” she said. “We have a solid balance sheet that positions us favourably for future growth and to absorb potential shocks.” Emerging risks Responding to a question about what the bank sees as emerging risks in the sector, the Managing Director of Absa Bank Botswana, Keabetswe Pheko-Moshagane identified three risks that could disrupt the business. These are cyber security, a subdued lending landscape and cost of compliance. “Firstly, if you look at Botswana’s financial market, our lending book is currently driven by household lending,” she said. “So when your macros such as high inflation and so forth, and the cost of living goes up, it means several things.” Firstly, she said, the purchasing power of consumers drops. Secondly, issues of subdued household income become prominent. “Another risk that we foresee is that COVID-19 has accelerated digital adoption,” she pointed out. “That on its own comes with cyber security threats and that has been coupled with cash-in-transit heists that we have seen over a short period of time,” she said, adding that this is likely to increase the bank’s operational costs at it responds to these dynamics. “Lastly, we all know that as a country, we recently come out of grey-listing and we have seen a number of legislative changes as a response to that. This means we are one of the industries that have to invent these changes. “So, our costs of compliance as well is likely to increase while also our customer experience could possibly be affected.” [/ihc-hide-content]

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Risks loom over the horizon for the banking sector

Absa Bank Botswana, one of the leading commercial banks in the country, recently announced what it described as solid financial results. However, it also warned of emerging risks ahead. Staff Writer KABELO ADAMSON reports

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Risks loom over the horizon for the banking sector

Absa Bank Botswana, one of the leading commercial banks in the country, recently announced what it described as solid financial results. However, it also warned of emerging risks ahead. Staff Writer KABELO ADAMSON reports

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