First National Bank of Botswana (FNBB) deposits slowed down 8 percent from P23.2 billion to P21.4 billion year on year owing to an increase in activity following the lifting of COVID-19 restrictions and the normalisation of the market liquidity.
The market priced up for fixed and notice deposits, in contrast to the reducing Bank Rate, in order to protect deposit franchises, the bank’s CFO Luke Woodford observed.
Tshegofatso Tlhong, the Portfolio Manager at Kgori Capital explained to this publication that when liquidity is tight, banks offer higher deposit rates to customers (normally on fixed deposit products) as a way of attracting more deposits that have a fixed term, She said this gives the Bank more liquidity for a determined duration. “This is a good thing for depositors as they earn higher interest on savings; especially given the low interest rate environment we are currently in,” she said noting that this isn’t great for banks because it increases their cost of deposits which they lend out at the prevailing rates on their products. “The margin they therefore earn on loans/facilities reduces due to the higher cost of funding that loan/facility,” she said in an email conversation. The Chartered Financial Analyst issued a report recently arguing that the banking sector is on the losing side of this equation due to margin compression on their existing loan books.
Against this background, Wordfood admitted to this publication that FNBB did engage in competing for funding resulting in the extension of the term structure by more than P1 billion. “The Bank remains well funded with a diversified funding portfolio and sound performance against regulatory internally set risk metrics,” said Woodford. FNBB reported a loan-to-deposit ratio of 62 percent and said it has access and options to raise additional funding from the market. Luke noted that borrowings have reduced by P300 million through the year with redemption of certain bonds. These have not been replaced as the bank believes its funding profile has remained appropriate through the year.
The bank noted a 22 percent reduction in interest expense which was driven by the reduced deposit portfolio, reduced borrowings portfolio and the bank rate cuts experienced in the past year. Combined with maturity of high value term deposits over the period, Woodford explained that this translated into lower cost of funds that resulted in repricing of short-term deposits.
The deposit mix shifted from overnight deposits to term deposits as clients sought higher yields. From a segmented perspective, FNBB saw 11 percent increase in the retail, and a 6 percent increase in the business deposits. “As we’ve seen, spending patterns have returned but that has been more than offset by the increased customer base that we’ve experienced in both retail and business as well as pockets of concentrated savings that we’ve seen within those segments,” Woordford noted.
Within the corporate space, at the end of June 2020 FNBB had significant deposits placed with the bank on a short term basis that were available for deployment to the eventual investment destinations.
FNBB reported a reduction in current and managed accounts from P12.2 billion to P10.5 billion largely on the back of the deployment of those funds. Woodford also noted that while the call in deposits remained approximately flat year on year, the bank has seen a reduction in call and an increase in term as clients who previously had kept money on demand are now seeing the opportunity. Their businesses and outlook are stabilizing providing opportunity to deploy those funds and earn high yields.