If you are looking to acquire a loan from a commercial bank, you better cross your fingers because chances are that you might get rejected.
This is a view shared by bank chief executives that commercial banks tightening their lending screws in line with difficult trading and regulatory environment.
As banks take the podium to announce weak financial results, they paint a familiar depressing picture of a sector under stress.
“There is a limited opportunity for loans and advances,” observed First National Bank Botswana Bank Chief Executive, Stephen Bogatsu. His colleague at Standard Chartered Bank (SCB) agrees with Bogatsu and adds that his bank is tightening its lending methodology as a cautionary measure pushed by prevailing market conditions.
Bogatsu says that households, which mostly consume unsecured lending will have a hard time acquiring funding from his bank. Other banks have taken the same route in the brave new world of ultra conservative lending. It is not only households that have been flagged. The private sector, whose expansion hinges on commercial banks are also up for a hard time.
Bogatsu explains that FNBB will reduce its lending mostly to households as well as the private sector. He says FNBB is tightening its lending methodology as a cautionary measure pushed by prevailing market conditions. This is the same caution that was raised by SCB CEO Moatlhodi Lekaukau recently when presenting his bank’s half year results ended 30 June 2015. Further, when presenting Barclays Bank Strategy a few weeks back, Chairman Rizwan Desai said Barclays would focus on retaining existing clients instead of attracting new ones.
Banks are moving away from interest income, and focus on non-interest-income as a new revenue stream. This means they are cutting down the amount of loans (either by value or volume) they used to lend out and rely on services to augment interest fees.
Commercial banks have been raking in millions of Pula through interest income, mostly charged on loans, but all the commercial banks now have changed their strategy and all of them are chasing Non-Interest Income (NII), the new money spinner.
At about P862 million, FNBB non-interest income contributed 50 percent of the total income during the period, prompting out-going Chief Financial Officer Boitumelo Bogopa to hint that NII helps diversify FNBB income base.
NII is mainly money the banks make from service fees, penalty charges. This includes cellphone banking charges, Automated Teller Machine (ATM) fees, Deposit fees and products such as Electronic-transactions. Interestingly, unlike Interest Income, NII is largely unaffected by economic and financial market cycles.
“Our non-interest income is even enough to fund our operating income,” admits Bogopa.
Non-interest income at SCB declined 17 percent to P202 million for the half year ending June 2015, but the income was marginally lower than the P242 million interest income for that period.
Initially, banks were squeezed by tight liquidity to reduce lending, because there was a shortage of loanable funds. Just like Bogatsu, SCB Chief Finance Officer (CFO) Mpho Masupe acknowledged that Bank of Botswana (BoB)’s P2.3 billion bailout improved increase liquidity, but both of them say that they will now be looking for new ways to raise capital for lending, rather than using available cash for lending.
Why the banks are conservative
Analysts are in agreement that the banking sector is under financial strain and that there will be more stringent requirements for lending which will see many falling outside the funding bracket. Afena Capital, Chief Investment Officer, Alphonse Ndzinge says that banks’ conservativeness is understandable as it is reaction to sluggish growth.
Ndzinge says that while access to finance will be limited, banks need to remain cautious. “First of all the household sector is highly indebted and lending more to them would be a risk that might see Non-Performing Loans (NPL) rise and lead to impairments.”
In total, businesses and households owed banks P45.8 billion by June 2015, according to Bank of Botswana (BoB) Financial Statistics.
Further, Ndzinge acknowledges banks’ reduced commitment to lending businesses and start-ups saying if banks become too liberal loan repayments will prove a challenge.
Revised national output is forecast to slow further to 2.6 percent and the budget is project to expected to record a P4 billion budget deficit. The slowdown is on the back of reduced mineral revenue, after Debswana reduced diamond production this year because of waning demand from China and the United States.
However growth of credit given to businesses slowed down from 4.5 percent to 4.2 percent while the households slowed down from 10.7 percent to 9.7 percent year-on-year.
Dark times for the banking sector
Bank of Botswana (BoB)’s accommodative monetary policy, has seen bank rate falling to as low as 6 percent, which has been squeezing margins resulting in reduced profitability for the entire banking sector.
FNBB, whose profitability used to hover just under P1 billion, has seen a drop in pre-tax profit, closing the half year ending June 2015 at P756 million, an 18 percent fall from P922 million. SCB also saw a 60 percent drop in profit before tax which fell to P85 million.
Barclays, under Reinette van der Merwe’s leadership which is expected to release financial results, announced that it expects a significant drop in profitability.
Both banks blame squeezed margins from the low interest rate environment. At FNBB, Bogatsu who is a few months onto his top post said they are expecting the regulatory environment to be tighter which will further pile pressure on the banks.
“We expect another bank rate cut,’ he opines, adding further that the implementation of Basel II/III will also increase Primary Reserve Requirement (PRR) further tightening liquidity.
He also sees no end to the moratorium imposed on non-interest by governor Linah Mohohlo.
The moratorium was introduced in January last year, and is supposed to be lifted by January next year, but there are fears that Mohohlo might not lift it.
“The governor is worried about high fees and continues to put pressure on the banks,” Bogatsu said.
However, he says he expects the banks to continue under such tough environment with limited lending opportunities and reduced profitability. “It will take us years before we reach the profitability that FNB has been at.”