Steep cost of funding squeezes BancABC’s balance sheet
• Bank seeks to grow non interest margins
Upcoming banking outfit, BancABC Botswana says it is seeking to expand its customer banking services to increase non-interest income against the background of record low interest rates.
The banks’ Managing Director Kgotso Bannalotlhe says it starts with services for customers like point of sales, cash deposits where they can charge fees for providing these services.
He believes it’s about services which are up to par allowing the ability for users to make transactions easily and consequently benefiting the bank’s revenue margins.
During the six months ending June 2020, BancABC non-interest income was impacted significantly due to reduction in activity volumes and discount measures put in place to support customers during the lockdown period, reducing by 33 percent year on year. According to the bank, the reduction in volumes was both on transactional banking as well as personal loans. This is inspite of the MD reveaing that the increase of digital transactions spiked by 60 percent.
The bank recently launched a commercial banking online transactional platform called BancOnline and Saru Money, the latter which the MD says has seen good uptake. Whilst signup on digital channels during this period rose significantly and should auger well for conversion of clients to electronic channels, the bank observed that the reductions in volumes have been substantial.
The bank’s interest income margins were impacted by the reduced interest rates. Net interest income (NII) improved by 19 percent despite two rate cuts of 50bps in August 2019 and April 2020 impacting the review period. Another rate cut followed in October. According to the bank, the growth in NII was supported by the growth in the loan book by 4 percent largely achieved in the first quarter and the successful reduction in interest expense of 15 percent year on year. The bank says the improvement in interest expense has been achieved through the more efficient use of technology such as the platform rolled out for corporate clients, BancOnline, and concerted effort to reduce the pricing of term deposits. The bank’s total deposits reduced slightly by about 4 percent year on year on tighter review end liquidity, however, deposit growth has returned to a stronger position early in the third quarter.
BancABC’s funding structure is heavily skewed towards term deposits and wholesale funding. In banking terms, wholesale funding refers to the business of receiving deposits from “sources outside of traditional consumer and retail deposits”, according to capital market experts. This is because the funds are sourced from larger entities, such as governments. In other words, a wholesale deposit is made by an institutional investor, a large business, another bank or an investment vehicle such as a mutual or pension fund. Wholesale deposits are usually large amounts of money and carry steep deposit rates the bank should pay, otherwise known as cost of funding.
Cost of funding, which the interest rate paid by financial institutions for the funds that they deploy in their business, reportedly remains elevated amidst market liquidity dynamics. Banks receive money from third parties as deposit and pay what is known as a deposit rate. They then loan out the money and earn interest. Higher deposit rates have been linked to lower profit margins in an environment of record low interest rates like Botswana. According to BancABC, its cost of funding is higher than industry margin which squeezes balance sheet margins. The Bank’s balance sheet has grown by a modest 3 percent driven primarily by the growth in the loans and advances at about 4 percent.
Overall, the bank says the retail lending continues to be the main driver of the asset book, however, volumes were muted due to the delay in the expected Government employee’s salary increases.
The bank says it continues to focus on building transactional banking capability in order to bring interest expense in line with market peers.