By Admire Mavolwane
THERE has been much debate on whether or not the country has certain fundamental and structural peculiarities such that conventional economic theories and practices cannot be applied with any measure of success.
However, the performanc
e of the stock market in February and March seems to suggest that the inverse relationship between itself and the money market also exists locally in the same way as it applies to other markets.
The world over interest rates and share prices have always been known to move in opposite directions.
Interest rates started firming in mid-February and have since then remained high, with the yield on the 91-day treasury bill reaching 525% per annum from the previous 340% per annum.
Investment rates have also followed suit with those for the short-term durations rising substantially.
Unlike in the past short-term deposit rates are now rising in sync with the Reserve Bank’s overnight accommodation rate rather than the 91-day treasury bill yield.
The former is currently at 750% for secured accommodation and 780% for unsecured overnight borrowing.
The stock market has consequently been weaker with the industrial index showing a negative return of 20,14% for March.
Investors have obviously been avoiding the stock market opting to capitalise on the high returns being offered on the money market.
Although many are making hay whilst the sun is shining in the money market they are doing so with a lot of trepidation.
High interest rates somehow open the now not so fresh wounds of December 2003 when a number of financial institutions, which eventually went under started exhibiting signs symptomatic of distress; paying above market interest rates.
Current investor uneasiness is understandable as history has this uncanny habit of repeating itself.
However, unlike in late 2003 when two camps emerged, with the big banks which were then paying relatively low rates being regarded as safe whilst the camp paying higher rates was deemed to be suspect, it appears that the tables might to a certain extent have turned.
It would appear that the “heavies” are the ones who are now paying higher than market average interest rates.
The nervousness has been compounded by the revised minimum capital requirements effective in six months’ time.
The balance sheet has since overtaken the income statement in terms of importance because it may not matter anymore how much money the bank made in December 2005 but, what is more crucial is how much the institution would need to make in the nine months to September 30 2006 to meet the minimum capital requirements.
As the graph below shows, a lot of sleep is being lost in the sector as many executives ponder how to bridge the gap.
By September 30 this year commercial banks are expected to have $1 trillion in capital and reserves, merchant banks, finance houses and building societies have had theirs pegged at $750 billion, whilst discount houses will need $500 billion.
On the same date asset management companies’ balance sheets will be expected to reflect $100 billion in shareholders’ equity.
The revised requirements were based on the exchange rate of $100 000:US$1 which would equate to US$10 million for commercial banks, US$7,5 million for the merchant banks, finance houses and building societies whilst discount houses and asset management companies are pegged at US$5 million and US$1 million respectively.
The US dollar levels will be maintained whilst the Zimbabwe dollar equivalent would from time to time be adjusted depending on the depreciation of the local currency.
A tentative date for any adjustment to become effective is December 31 2006.
As most of the banks indicate in their board commentaries, shareholders should be prepared to inject more capital.
It is worse for the likes of Kingdom and NMB which raised capital through rights issues less than 12 months ago.
What makes it even more problematic for investors to fathom is the fact that the minimum capital requirements will be a moving target as long as the Zimbabwe dollar continues to depreciate.
At the moment, there is nothing to suggest that it will not.
Non-listed banks, at face value have an even much bigger problem, as it is not that easy for them to raise capital.
With the prospect of paying a dividend being very low in the medium term, what carrot will these banks dangle in front of potential shareholders?
Listed entities have it relatively easier, but judging from recent trends many may not be listed for long.
Recent experiences with the Kingdom and NMB rights issues show that major shareholders follow their rights and in some instances underwrite the capital raise.
The proportion held by minorities has thus been dwindling and many of these listed banks will soon be in contravention of listing regulations
If the minimum capital requirements are the local currency equivalent of the above stated US dollar amount, then why shouldn’t the banks be allowed to raise US dollars and lodge the same with the central bank, like in the early days of the banking system.
In this way, the institutions are hedged against the depreciation of the local currency and the whole capitalisation issue becomes a once off exercise.
Otherwise, most of them will be forced to raise more Zimbabwean dollars every three or six months.
Another consequence of the pegging of minimum capital requirements has been the nullification capital adequacy ratio as a guide to a bank’s soundness and quality.
Whilst we subscribe to the idea of following international trends, the importance of US dollar-based capital requirements appears to be overly harsh especially given the fact that none of the local institutions underwrite US dollar-based transactions and are not even allowed to hold own positions in foreign currency
As such, we feel that the soundness of a financial institution should be based more on the local currency evaluated capital adequacy ratios than on the route being taken.
In any case, the capital at any given point is invested in the “most secure” asset in the country; treasury bills.
The real dilemma is with asset management companies.
At $100 billion, the capital is out of reach for most of them and if they do raise it, where will they invest the funds?
This raises the issue of conflict of interest as it is likely that own funds will dwarf all other clients and the asset management company becomes its own biggest client.
For a non underwriting institution, US$1 million seems to be unnecessarily high.
The overall net result of the new capital requirements would be to reduce the number of players and competition in the sector.
Already the likes of Kingdom and ABCH have started the process of surrendering their discount house licenses.
One actually empathises with the promoters of NDH and CFX who have been working hard to revive these institutions and, before they could rest after the proverbial six days, they now have to put on another charm offensive to raise even more funds.
Also the Reserve Bank, besides being the regulator is also a major shareholder in almost three banking institutions, one of them being ZABG.
So is the central bank prepared to inject more capital into these institutions and how will it raise the funding? Food for thought!
Article supplied by Tetrad Group.