Analysis: BENEDICT TEMBO
THE banking industry had its own ups and downs in 2018 with general improvements in recapitalisation and corporate governance standards.
The defunct Inter-market Bank was restructured and recapitalised under the newly-reconstituted Zambia Investment Bank Corporation, which signalled the Bank of Zambia’s (BoZ) capacity to secure depositor funds away from the common liquidation model of the 1990s.
Investrust Bank has experienced changes in its capital structure with the ZCCM-IH emerging as the majority shareholders of the bank.
Economist Chibamba Kanyama said this move, though against BoZ’s ownership benchmarks, should comfort the market until such a time the shareholding structure is reconsidered. “The Bank has a new team of highly energetic and experienced management and we anticipate significant turn-around from loss-making to profitability,” Mr Kanyama said.
He said Indo Zambia provides leadership in corporate governance standards, something that most commercial banks have fallen short of.
“However, this benchmark will now call for enhanced commercial bank leadership, effective monitoring by the Bank of Zambia, transparency and full disclosure on bank performance. Investors and depositors are beginning to develop faith in the quality of commercial banks in Zambia,” Mr Kanyama said.
He notes that the performance of commercial banks in 2018 should be looked from various perspectives.
“First, most banks reported significant revenue growth in 2018, spurred by a significant reduction in the statutory reserve ratio from 18 percent in 2017 to 8 percent. This decision by BoZ eased the liquidity conditions in the country, hence the expansion of the loan book and relative reduction albeit still high interest rates,” Mr Kanyama said.
He said most banks leveraged the high credit levels to grow their lending activities which should translate into higher revenues at the end of the current financial year.
“Second, credit risk expanded in 2018 as banks advanced more and more loans. The non-performing loans are expected to marginally increase from 11.6 percent and 2017 to 12 percent. One of the reasons is the build-up in government arrears as commercial banks remain the most exposed to government financing through government securities,” Mr Kanyama explained.
He said the economic environment has also been quite challenging in 2018 as most companies are still recovering from the 2015-2016 economic crisis.
“The high interest rate environment in 2018 has also paused a credit risk given that most creditors do not have sufficient cash flows to meet their loan commitments. However, in response to this, commercial banks increased private sector lending by around 10 percent in 2018 and we expect this exposure to expand given that the Bank of Zambia has continued to keep the monetary policy rate at 9.25 percent,” Mr Kanyama said.
He said banks generally faced a transition challenge with the new International Financial Reporting Standards (IFRS) that took effect January 2018.
“Zambia is not yet fully ICT-complaint and this accounting standard that depends on significant automation standards paused a challenge to a number of banks, some of them falling short of providing the market with the most authentic financial statements owing to weaknesses in data credibility, inability to model future prospects and weak business impact assessments. Banks also experienced difficulties in quality skills as they continued to compete for same small experienced manpower,” he said.
The Economics Association of Zambia (EAZ) noted that credit growth tripled to 9.9 percent in the third quarter of 2018 from 2.9 percent in the second quarter.
“The Bank of Zambia governor (Denny Kalyalya’s) presentation revealed at the last monetary policy change for the year 2018. Excluding Government, credit grew by 14.3 percent (in the third quarter) compared to a growth of five percent (second quarter). However, growth in credit to Government rose to 6.2 percent (in the third quarter) from 1.3 percent in the preceding quarter,” Mutisunge Zulu, the EAZ national secretary, said.
Mr Zulu said private sector credit growth increased to 19.2 percent from 4.7 percent with growth in credit to households rising to 7.5 percent from 5.3 percent.
Mr Zulu notes that sustaining high growth in credit to private enterprises is critical to supporting strong private sector-led economic activity.
“However, ballooning doubtful debts continued to erode industry commercial bank earnings. Headline earnings for (first quarter to third quarter), as per published prudential returns, showed a flat earnings growth at K1 billion. This was a marginal 0.3 percent slide compared to year to date (from the first quarter to third quarter in 2017). Front-runners were Barclays Bank (K249 million), Standard Chartered Bank (K221 million), Stanbic Bank (K155 million) and Bank of China (K103 million),” Mr Zulu said.
He said following the BoZ directive to scrap unwarranted fees going forward, banks’ fee income line will narrow for those whose models depend on fees and commission.
“However, this will add immense pressure and will also overemphasise the need for structured products and focus on areas such as foreign exchange and interest rate trading to compensate for the loss in income from unwarranted fee directive implementation,” he said.
Mr Zulu said banks remain resilient and well capitalised to weather fiscal headwinds.
“The banks have still remained key partners in the Zambian economic growth equation. More and more banks are coming to the digitisation party in alignment with SMART Zambia through strategic partnerships with telecommunications service providers such as MTN, Airtel and Zamtel,” he said.
Mr Zulu said generally, 2018 has been very positive for commercial banks.
“The real threat going into 2019 is the rate of inflation that has affected the financial modelling of commercial banks. In 2017, the inflation rate was at 6.7 percent but the average this year is 7.5 percent. Compounded with the movement in the exchange rate which has seen the Kwacha lose about 18 percent in the past one year, commercial banks consider this development a huge threat on the loan books. We are yet to know the true picture in March when most books close their financial year books,” he said.
The author is Zambia Daily Mail editorials editor.
Analysis: BENEDICT TEMBO