The banking industry remained liquid as indicated by statutory liquid assets, which increased by 5.2 percent to P15.4 billion in 2020 from P14.7 billion in 2019, a report released by the Bank of Botswana (BoB) showed. The 2020 Banking Supervision Report indicated that the liquid assets to total deposits ratio for banks declined slightly from 19.3 percent in 2019 to 19.1 percent in 2020 but remained above the required 10 percent prudential minimum.
Notwithstanding, the report found that banking sector continued to show high levels of funding and maturity mismatches; banks continued to be funded by short-term, highly volatile deposits of large corporations and institutional investors, against a significant proportion of medium-to-long term loans (notably mortgages).
As shown by BoB, the relative shares of deposits by maturity changed marginally between 2019 and 2020; long-term deposits (time and savings) contributed 48 percent in 2020 and short-term deposits (call and current) accounted for 52 percent (Chart 2.15). If this trend is sustained, the maturity mismatch risk, a persistent characteristic of the Botswana banking sector, will continue, the report observed.
Funding sources for asset growth were customer deposits, share capital, debt securities and other borrowings and balances due to other banks. Customer deposits, which are the main source of funding for the banking industry, grew by 6.4 percent from P75.7 billion in 2019 to P80.5 billion in 2020 and constituted 78 percent of liabilities. Share capital, accounting for 11 percent of liabilities, increased by 3.6 percent from P10.9 billion to P11.3 billion in the same period. Debt securities and other borrowings increased by 17.5 percent from P4.8 billion in 2019 to P5.6 billion in 2020.
Under the period in review, total assets for the banking industry increased by 4.6 percent from P98.7 billion in 2019 to P103.3 billion in 2020, while customer deposits grew by 6.4 percent from P75.7 billion to P80.5 billion, contributing 78 percent to total funding of banks. The supervision report noted that the increase in deposits supported growth in loans and advances, which expanded by 4.4 percent (a slower pace than the 7.6 percent in 2019) from P62.8 billion to P65.6 billion in the same period. The financial intermediation ratio declined from 82.9 percent in 2019 to 81.4 percent in 2020.
Commercial bank credit grew by 4.4 percent in 2020, slower than the 7.6 percent growth in 2019, even as deposits increased by 6.4 percent. The average cost of deposits fell slightly in line with the monetary policy easing in 2020, albeit not to the same magnitude on account of the structure of funding of banks, which is dominated by highly volatile, large-value deposits controlled by institutional investors. However, the report showed that the cost-to-income ratio increased marginally compared with that of the prior year owing to, in the main, additional investment on infrastructure (physical and technology) to ensure safety of customers and sustenance of banking services in the COVID-19 environment.
The overall effect of sluggish credit growth and the increase in the cost-to-income ratio was a decline in the banking sector profitability in 2020. Accordingly, the net after-tax profit of the banking industry declined by 17.5 percent from P1.8 billion in 2019 to P1.5 billion in 2020. The return on equity and return on average assets decreased from 16.2 percent and 1.9 percent in 2019 to 12.9 percent and 1.4 percent, respectively, in 2020. The level of banking profits has generally trended downwards in recent years on account of relatively low levels of interest rates and the resultant tight margins/spreads, increased competition for large-value, volatile deposits and the restrained growth in non-interest income, against a modest growth in the volume of business (customer base and loans), the report found.
Nevertheless, the asset quality of the banking sector, as measured by Non-Performing Loans (NPLs), improved, with the ratio of NPLs to gross loans and advances falling from 4.8 percent in 2019 to 4.3 percent in 2020. The report noted that NPLs decreased mainly because of the ongoing efforts by banks to strengthen credit assessment criteria, focussing on creditworthiness and bankable projects. In addition, it said the implementation of the circular to banks on guidance on the regulatory treatment of IFRS 9 provisions on account of the COVID-19 pandemic contributed to the reduction in NPLs during the loan-payment holiday, since banks were allowed to treat all loans placed on “repayment holiday” (selective moratorium on the agreed payment programme) as performing credits.
“Broadly, therefore, the provision of banking services, including lending, held up even in the COVID-19 environment,” said the report. Nevertheless, core indicators of financial sector depth and development continue to demonstrate that the country’s banking industry is small relative to gross domestic product (GDP). Therefore, the report suggests that there is significant scope for growth enabled by adoption of new technologies, growing demand for innovative products and market competitiveness, sound governance standards and institutional arrangements, and effective prudential policies and regulation.
Generally, the composite credit risk for the banking industry was assessed to be high. The report cautions that the credit quality is expected to deteriorate in the short-to-medium term owing to the possible loss of employment and slowdown in economic activity, generally, resulting from the adverse impact (closures and partial operations) of the COVID-19 pandemic on businesses and households. “This outlook for asset quality deterioration is expected to be moderated in as much as a large proportion of bank credit in Botswana is accounted for by retail and household credit, which, although mostly unsecured, is to a large number of relatively small uncorrelated borrowers employed mainly in the public sector,” said the report. “Furthermore, a significant amount of household and other retail loans is supported or protected by credit-life policies, mortgage payment protection insurance and lien over life insurance policies, which has effectively transferred some banking risks to the insurance industry.”