Transactions and near-transgressions

At a briefing recently, Standard Chartered Bank openly said it wants to ensure that its non-funded income lines grow more aggressively than interest income so that its returns are in the right place, in case current headwinds come into the market. By headwinds, the oldest bank in Botswana refers to the spiralling cost of funding and low interest rates that have compressed interest income margins for banks. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] For the first half of 2022, the bank said its income grew by 11 percent y/y, underpinned by growth across all segments. Net interest income was a drag on performance in the first quarter due to pressure on margins, the bank wrote in its financial report where it also noted that the second quarter saw a strong rebound in which it benefitted from improved margins. Importantly, the bank noted that its non-funded income is on an upward trajectory, growing by 14 percent y/y supported by momentum of economic recovery, with transactional activity recovering to pre-pandemic levels. Currently non-funded income makes up about 40 percent of total income, according to the bank’s CFO, Tapiwa Butale. She disclosed that the target is to raise this to a 50/50 split. The top executive said they focused on growing that non-funded income by increasing the bank’s customer base. The more the bank grows its customer base, the more it believes it will derive non funded income. Butale emphasised that growth in non-funded income is one of StanChart’s strategic targets because this would mean the profitability is quite sustainable as opposed to margin income which is controlled by cost of funds and the direction in terms of the monetary policy rate. A key mandate of banks is to extend loans and help the economy to grow. However, based on the trend of results for some of the banks, it would seem they have lost interest in this primary role and are generating money through transactional fees, which is not the core of the banking sector. At Absa Bank Botswana, the Public and Media Relations Manager, Spencer Moreri, told The Business Weekly & Review that the bank aims to diversify its revenue pool in line with its strategy but balancing it with Absa’s primary objective of extending financing to facilitate economic growth. Given that there is a general consensus that few opportunities are available for funding in the economy, Moreri said Absa is pursuing several options to grow its non-interest income. These include driving customer primacy, addition of new customer digital offerings and enhancement of customer these including ATMs, process automation, and continuing to drive collaboration efforts across the business to ensure that the bank delivers a better customer experience, thus driving the use of digital channels. At the moment, Absa’s Non-Interest Income against Interest Income stands at 60.39 percent while Non-Interest Income to Total Income is 37.65 percent. While it is widely believed that banks seem to be losing interest in credit extension and are instead focusing on generating revenue through transactional fees, Moreri, does not believe this is the case. “As a bank, we are committed to our core mandate of extending financing to facilitate economic growth,” he said in an interview. “Year-on-year our loan book has grown by 5 percent. The bank supports economic growth, and there are several programmes in place such as the Small Medium Enterprise (SME)/Enterprise Supply Chain Development (ESD) programme which aims to facilitate citizen participation in large corporate value chains.” He emphasised that sectors and projects that have been funded by Absa support Botswana’s national development objectives. “It is also evident in our 30 June interim results where over 60 percent of our revenue is from NII/lending book.” According to Moreri, the bank’s strategy is to provide meaningful solutions to customers. “We continue to play a significant role in growing the economy through the facilities and support we extend to the various sectors,” he said. “It is equally important that we facilitate customers’ transactions in a manner that is convenient, safe and inclusive.” Due to rising inflation and interest rates, Absa expects these factors to slow credit demand in the short term. “However, there are opportunities in the agricultural sector to support food security measures,” Moreri said. “We continue to support key clients in both the beef industry and crop production, and anticipated rebound in tourism and citizen empowerment initiatives are potential areas of growth.” He emphasised that Absa continues to support all sectors and that sector appetite correlates to sector contribution to the government’s diversification agenda. At First National Bank Botswana (FNBB), Director of Marketing and Communications, Peo Porogo, says the bank has no pre-determined ratio when it comes to a target split between Non-Interest Income and Interest Income, “as the interest rate cycle has a significant impact on the balance between the two”. “However, the bank actively ensures that it meets the end-to-end requirements of customers,” she said. “This may involve transactional services, deposit facilities and lending needs. The customer needs are always our core focus.” For the year ended June 2022, the bank’s Non-Interest Income versus Interest Income was 0.97 percent while for the year ended June 2022 the bank’s Non-Interest Income against Net Interest Income was 1.19 percent. According to Porogo, FNBB ensures that it strikes a balance between growing the economy by way of credit extension and generating revenue through transactional fees continuing to play a pivotal role in economic stimulus through responsible lending in areas where there is opportunity. “We have revamped our SME offerings with the aim of helping grow budding industries and participate strongly in citizen economic empowerment programmes aimed at local capacity creation and boosting employment,” she argued. “Our purchase order solution allows local companies to fulfil procurement requirements by providing much needed funding.” From a transactional fee perspective, she said, the bank continues to strive to add value to its customer base through provision of innovative products to simplify banking through its various channels, both digital and traditional. “The bank also strives for financial inclusion by reaching out to previously unbanked segments of the economy through convenient product offerings such as Cashplus, which has enjoyed huge success since its launch a couple of years ago,” she pointed out. Porogo stressed that financial intermediation remains a core responsibility of FNBB and is one that it continues to place at the centre of its activities. She added: “We’ve seen continued growth in lending across the market through the past few years. FNBB grew its lending portfolio by 8 percent over the past year with the majority of this growth being in the corporate environment.” While the majority of the bank’s lending portfolio grew mostly in the corporate sector in the past year, Porogo noted that FNBB has a strong retail portfolio with just over 60 percent of lending towards individuals for property financing, asset financing, and personal loans. The remainder of the loan book, she said, resides in the corporate and commercial space, mainly in trade, commercial real estate, construction and manufacturing. “This is aligned with the overall lending construct in the banking industry,” Porogo said. “In the last few years, we have seen strong growth in lending to the corporate sector and the bank’s appetite for credit extension, especially in the mining, agriculture and tourism sectors, remains strong.” FNBB, however, anticipates a muted credit demand in the short to medium-term as consumers come under pressure. “With inflation currently treading well above the Bank of Botswana targeted range, the bank foresees further increases in interest rates by the central bank in the short to medium-term as it attempts to curb inflation,” she pointed out. With the majority of loan facilities linked to the Monetary Policy Rate (MoPR) as a reference rate, Porogo said this will see consumers come under pressure, hence muted credit demand. “However, the bank will continue to play a pivotal role in stimulating the economy by identifying lending opportunities across all sectors whilst employing the principles of responsible lending,” she said [/ihc-hide-content].

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