Botswana bank’s client loan growth is expected to slow from 10.0 percent year-on-year to 7.0 percent at the end of 2023 as a result of weaker economic growth and the lagged impact of interest rate increases.
This is according to analysts at risk assessment company, BMI Research. It says the deposit growth will soften from 11.6 percent y-o-y to 8.5 percent over the same period. “There are risks on both sides of banks’ balance sheet. Banks have a high proportion of unsecured credit and wholesale deposits, both of which are more volatile in nature,” the report says.
According to the report, although the latest stress tests for banks found that the sector is resilient, banks will suffer considerable falls in capital if loan quality significantly deteriorates. It says even though loan growth has risen slightly in previous months, slowing economic growth and the lagged impact from monetary policy tightening in 2022 will weigh on demand for loans in 2023. “We also expect banks’ appetite to lend will decline to guard against worsening loan quality as the cost of credit remains high,” the report says.
BoB’s financial stability report
“In real terms, we think that lending will grow by 2.8 percent y-o-y at end-2023, compared to a contraction of 5.6 percent at end-2022,” the report says. It references the Bank of Botswana financial stability report in May that highlighted that banks are exposed to funding risks due to deposit concentration.
“Private businesses accounted for 63.5 percent of total deposits in May 2023, compared to 20.9 percent for households, of which wholesale deposits dominated banks’ funding structure, accounting for 78.5 percent of corporate deposits at end-2022 (latest available data),” it notes. The report says wholesale deposits are much more volatile in nature, and can increase funding costs for banks if they dry up. It observes that while the banking sector will remain liquid, average daily market liquidity has trended downwards since the pandemic.
The sector had a loan to deposit ratio of 78.6 percent as of May 2023, which suggests banks have enough liquidity to cover any unforeseen funding requirements, although also suggesting inefficient use of funds. “However, this excess market liquidity has been trending downwards since the pandemic, and fell considerably from P4.7billion in January 2023 to P3.5billion in February,” says the report. It attributes this to weaker trade weighing on net foreign exchange outflows and payment for foreign obligations and settlement of some government bonds.
Unconstrained to lend
“Average daily market liquidity increased somewhat to P3.8billion in March (latest available data), as a result of increased government spending,” it says. BMI Research holds that banks will remain liquid, despite the possibility of further falls in excess liquidity due to tighter conditions, and remain unconstrained to lend to the economy.
It says financial soundness indicators remain strong but expects a worsening of loan quality. “We think that lags from monetary tightening in 2022 will result in a deterioration in loan quality for the remainder of 2023,” the report warns. “We also note that Botswana’s banks have a considerable proportion of unsecured loans on their balance sheets, which are inherently riskier and more expensive than secured credit.”
The report warns that banks could see a rise in the level of non-performing loans (NPLs) of unsecured credit, which accounted for 69.1 percent of total household loans, this being considerably higher than 30.8 percent at South African banks and 24.4 percent at Namibian banks. But inspite of NPLs rising in recent months to 3.7 percent in May 2023, the ratio remained low by historical standards and compared to Botswana’s peers.
Resilient to stress
The report says the latest stress tests for banks highlighted three main findings. Firstly, the sector is generally resilient to stress, except for severe credit shocks. In the moderate stress scenario, where an additional 10.0 percent of performing loans became NPLs, banks’ capital adequacy ratio (CAR) fell to 11.7 percent, below the minimum requirement of 12.5 percent, falling further to 2.1 percent in the severe situation where 20.0 percent of additional loans are NPLs.
Secondly, the report says, all banks could withstand liability drawdowns for 15 days in the moderate liquidity stress scenario and three days for the severe scenario. Thirdly, BMI Research says domestic banks are highly liquid and have the ability to hold bonds to maturity, suggesting limited risk from the potential repricing of government bonds.
The report indicates that as a share of total loans, the NPLs stood at 3.7 percent in May 2023, which is low, especially compared to Botswana’s regional peers. “We expect the NPL ratio, which was hardly affected by the pandemic, to worsen slightly over the coming quarters as a result of elevated interest rates, making borrowing more expensive,” it says.
The banking sector will retain its relatively solid, deposit-heavy funding structure, with customer deposits constituting the majority of banks’ total liabilities. “The sector’s loan-to-deposit ratio currently stands at 78.6 percent, as of May 2023,” the report says. It notes that the market is highly concentrated, with the four largest banks owning around 80 percent of total assets out of only eight licensed commercial banks present in Botswana.
