YESTERYEAR, the investment case for venturing into commercial banking was the prospect of accessing cheaper deposits. Retail deposits come with low costs as most transactional accounts earn hardly any interest.
Although savings accounts pay interest, the rates tend to be lower than, say, wholesale deposits. Most of the deposits would be lent to individuals and companies requiring funding. The net amount arising from the margin between interest paid and received was, then, the top contributor to operating revenue for banks. The desire to access cheaper retail deposits largely explains why many banking institutions that started with lower level licences such as those for finance houses and merchant banks converted them to commercial ones.
Even now, a commercial banking licence in this country is still deemed the ultimate prize in the financial sector. Unlike in the past, the cheaper deposits are not seen as a source of net interest income anymore, because lending is no longer considered the lifeline of banking. More revenue has been coming from non-interest sources like trading, currency dealing, revaluations on properties and equities, as well as fee and commission income. Before dollarisation, fair value adjustments on property and equity investments constituted the bulk of the non-funded revenue.
Hyperinflation forced banks, through their investment vehicles, to hold real assets to preserve value. As inflation worsened, assets repriced swiftly and in the end banks would book colossal amounts in the comprehensive statement of income as revaluation gains. Paper money, it could be said, but all the same it boosted the financial position of the banks.
Non-interest income still contributes the bigger share of bank revenue — 69,7% — for the 13 commercial banks that have reported June 2010 interim results, so far, post dollarisation. The difference though is that fair value gains vanished with the end of inflation. Fee and commission income now make up the bulk of the non-funded revenue. Using the statistics on the 12 commercial banks that have published their interims out of the 15 active banks, fee and commission income was 74,6% of non-interest income. The three banks yet to publish results are Interfin, TN and ZABG.
For the big four banks in terms of assets, namely CBZ, Standard Chartered, Stanbic and Barclays, fee and commission contributions to non-interest revenue were 64,5%, 86,9%, 71,7% and 50,4% in that order. For Barclays, the ratio will be 83,5% if the US$6,5million special support received from the parent company is removed. The money was used to cover retrenchment costs. For the second tier banks such as Agribank, FBC, Metropolitan, NMB and ZB the ratios were 96,7% to 102,5%, implying that fees and commissions constituted all the non-funded income.
What constitutes fee and commission income? It is generated from overdrafts, account service, fund management, loan arrangement, advisory services, custodial services and sales of third party financial products such as insurance. Whereas commercial banks are allowed to offer almost all of these products, the merchant banks are largely precluded from doing so. Merchant banks are not allowed to collect account service charges and overdraft fees just to name but two. Incidentally, these are some of the most profitable sources of income for commercial banks. Fees are by and large pure profit and very lucrative to banks although they tend to be cyclical in nature. Other non-interest income primarily bank charges is reasonably defensive. As long as a bank has a stable and large deposit base, it can expect to continue earning revenue from service charges. June financial results clearly show that all commercial banks benefited immensely from fees and commissions.
The growth of fees and commissions ahead of interest income appears to validate the widespread claim that banks could be overcharging their customers. Among the believers in this view is the Reserve Bank, which, in one of their Monetary Policy Statements demonstrated in detail that local banks were charging more than their peers in the region. Naturally the banks, through the Bankers’ Association of Zimbabwe, refuted this claim saying their charges were competitive. All that aside, charges should be set at levels which not only make the business of banking viable but also foster the confidence of depositors in their banks. High charges can be a big disincentive to saving.
There is evidence that the banking model in this country has changed. Unfortunately, the regulations have not been adjusted in line with the changing times. For instance, the banking act still segregates financial institutions into different licenses yet the business environment has pushed categories such as finance and discount houses to extinction. The revenue and profitability trends post dollarisation are indicative of the fact that even the merchant banks could soon be joining the departed duo.
What is needed is a universal banking licence allowing every institution to offer a broader range of products. There is much talk
about it, but when will it come?