It’s an open secret that the Zimbabwean economy has not been optimal for quite some time now.
So the question is: How are banks operating in the country remaining so profitable when most industries have been adversely affected by the macro-economy?
Last year, for example, 18 out of the 19 operating banking institutions in the country posted profits for the period to December 31, 2017, recording a net profit of $241,94 million, according to figures from the Reserve Bank of Zimbabwe (RBZ).
That banking sector net profit was actually 34 percent up from $181,06 million on a year-on-year basis.
It is canonical in financial services that banks principally make money by lending at rates higher than the cost of the money they lend.
But, as afore-mentioned, local players in the sector have largely defied this simple logic.
Banking sector income in 2017 was largely driven by fees and commission arising from an increase in real time gross settlement (RTGS), mobile banking and point-of-sale (POS) transactional volumes.
A breakdown of the local banking sector’s income mix as at the close of the third quarter of 2017 show that the bulk of banks’ income came in from fees and commission at 38 percent, while interest income from loans, advances and leases accounted for 37 percent.
Interest income on investments and securities accounted for a significant 15 percent, while foreign exchange and interest income on balances with banking institutions accounted for 1 percent.
Skewed banking model?
The above income mix points to a rather skewed banking model.
But a rule-of-thumb can have broad application and is therefore not a reliable measurement for every situation.
Nevertheless, something is clearly amiss about local banks’ consistent profitability in an economy that has been struggling for the past decade.
Local banks are lending less. In an environment where margins have come down considerably, banks are reducing the cost of funds. In this vein, banks are trying to pay off expensive lines of credits which they had acquired, and this has contributed to the decline in the level of lines of credit.
The misaligned banking model is even more apparent in view of the prevailing cash shortages that have blighted the economy in the last two years or so.
Economic and business analyst Perry Munzwembiri seeks to provide an explanation:
“I am of the view that the local banking sector has been rather fortuitous, and the seemingly impressive performance is as a result of chance rather than intention. Over the years, prior to the interest caps imposed by the central bank, the banking sector was charging above normal interest rates, which led to the sector realizing super-normal margins on its funded income (interest income).
“This was never sustainable especially given how a decline in the level of quality credit borrowers meant that total advances in the sector, would also be lower.
“The cap in interest rates has however exposed the frailties of a model underpinned by charging usurious interest rates underpinned by a lack of quality borrowers, as interest incomes across the sector have taken a knock,” he said.
Let’s take a look at CBZ Bank (Zimbabwe’s largest financial institution by deposits)’s number for the year under review.
In terms of financial performance for the year to December 31, 2017, CBZ registered an after tax profit of $27,8 million, a 17 percent rise from prior year.
Analysis shows that the improved profitability was on the back of a significant increase in non-interest income during the period under review.
CBZ’s total income stood at $175 million, up 10 percent from $159 million in the prior comparable period.
Management attributed this to growth in non-interest income, which was up 32,3 percent to $91,4 million from $69 million, previously. Net interest income took a different route sliding 7,4 percent to $75,6 million from $81 million.
The group’s assets rose 5 percent to $2,2 billion from $2,1 billion in the previous fiscal year.
Total deposits were also up, jumping 4,2 percent to $1,85 billion from $1,78 billion last year. Advances were lower at $941,4 million, a 6,5 percent decline as the group adopted a more cautious approach to lending during the period under review.
The bank’s quantum of Treasury Bills (TBs) currently stand at $899,9 million from $760 million in FY2016.
The numbers above show that non-interest income is a significant factor. But other factors also become apparent.
One such key factor is that a number of banks have benefited immeasurably from trading Government paper (treasury bills) at a discount and having their bottomlines boosted by the margins realised.
Clearly this has got nothing to do with skill or strategy on the part of the financial institutions in question (we should now see the real impact of those TBs on banks’ bottom-lines as Government has since moved to put a moratorium on its borrowing through the issuance of the tradable TBs).
And with regard to TBs there is also the ZAMCO (Zimbabwe Asset Management Company) factor, as one banking sector insider who requested anonymity highlighted:
“A lot of banks were sitting on huge non-performing loans which were weighing down their performance. After restructuring their balance sheets, and thanks to the intervention of the Authorities through ZAMCO, the non-performing loans were converted to TBs although at a discount.
“The TBs therefore started contributing to interest income. Tied to this, has been careful credit selection process. The setting up of credit bureau or registry which compiles information on individuals and corporates such as data on credit repayment records, court judgments, and bankruptcies before creating comprehensive credit reports that are availed to lenders or creditors is also meant to improve lending weed out perennial defaulters,” said the insider.
“Secondly, some banks were able to discount some TBs in the secondary market. In other words, there were a lot of other players or businesses which sold their TBs at a discount to the banks. These companies liquidated their TBs because they wanted immediate cash to plough back to their businesses as working capital. So instead of borrowing to fund their activities, these companies simply sold the TBs they had.”
Benefitting from the cash shortages
Perhaps not a fault of their own, Zimbabwean banks have over the past few years broken an essential rule of banking, that is, the ‘principle of liquidity’, which basically refers to the ability of a bank to pay the deposited money on the demand of customers.
But they have not just broken it, they have profited from breaking it.
The cash shortages affecting Zimbabwe have led to a sharp growth in transnational volumes as more people have to use POS transfers, mobile and internet banking, whereas in the past they would have used cash.
This has inadvertently caused the banking sector`s fee and commission income to rise. And the major beneficiaries are those banks with an extensive POS, agent network and efficient e-channel delivery systems.
This has absolutely nothing to do with these banks doing certain things better than other sectors.