Botswana’s top five commercial banks make up 83 percent of total customer loans and advances and 86 percent of total assets in the industry, according to the Managing Director of Allan Gray Phatsimo Ncube.
As at December 2021, Ncube says the top five all had capital adequacy ratios ranging from 15-21 percent, exceeding the minimum of 12.5 percent set by the Bank of Botswana. “This increases the likelihood of them being able to weather any near-term liquidity challenges,” she says in response to questions from The Business Weekly & Review. Market liquidity has been nosediving from 2021 to-date, triggering contraction of market Liquid Asset Requirement that plummetted from 19 percent to the current 15 percent, according to Ratang Molebatsi, Finance Director at Access Bank Botswana.
Liquid Asset Ratio minimum is 10 percent and the industry is currently well above that at about 15 percent. Allan Gray’s Ncube says there have been periods of higher excess liquid assets in the past, but this does not mean that the banks needed to hold that much additional capital. “Banks can also be less inclined to increase surplus liquidity in an environment where new credit extension is constrained by an outlook for reduced economic activity,” she says.
Although liquidity has significantly declined, Molebatsi views that the market has enough liquidity to fund any credit and funding needs in the market. “Therefore, we do not envisage any crisis,” she notes. “The Bank of Botswana also keeps a close eye on market liquidity developments.” The CFO of Standard Chartered, Tapiwa Butale, supports this: “We have been through the same previously and believe that we will get through this again,” Butale says. The general consensus regarding the health of the sector is that balance sheets, broadly speaking, are currently sufficiently robust to avert any crisis if any, threatens to break out.
Even though liquidity has been on a decline, the credit extended by commercial banks has been on an increase driven mainly by activity in the business sector. Commercial banks credit grew by 6.6 percent in the year to April 2022, higher than the 3 percent that was recorded during the same period in 2021. Economists at Econsult Botswana acknowledge that the domestic banking sector continues to demonstrate considerable resilience. Annual bank credit growth reached 6.6 percent in April 2022, up from 4.7 percent in January 2022, according to a Q2 report by the respected think tank.
As a reflection of improving economic activity, Sethunya Kegakgametse and Kitso Mokhurutshe found that credit to firms rose to 8.4 percent in the year to April 2022, its highest level since January 2019. But the two, who compiled the Econsult report, say this increase was partially offset by a decline in the growth rate of credit to households, which fell to 5.6 percent, its lowest level since mid-2017. “This could be indicative of growing uncertainties over consumer incomes as inflation continues to rise and adjustments that encourage saving are made to monetary policy,” they wrote, adding that March 2022 was the first time that the growth rate of credit to firms surpassed the growth rate of credit to households since February 2019.
As of May 2022, gross loans in the industry increased by 7 percent year-on-year; this from a low base, given the slower credit extension in 2020/2021 due to the COVID-19 pandemic. Given the current inflationary pressures and the tightening of monetary policy, Ncube cautions that credit extension may be muted going forward. In addition to the positive developments, Kegakgametse and Mokhurutshe noted that arrears on bank lending remained low by historical standards, although rising marginally from 5.2 percent in Q4 2021 to 5.4 percent in Q1 2022, “further emphasising the market’s resilience”. Banks’ profitability has also improved with net after tax rising 24.4 percent to P1.8 billion in 2021. Although Econsult report shows that the profitability has been coming down over time. Read story here: Behind the inexorable decline of banks’ profitability
