Banks ‘making hay whilst the sun shines’

The market has recently received a wide range of results from the bank sector and indication is that the sector is vibrant for some, and equally challenging for others.

Recently- announced results range from losses reported by Ecobank, Trust Bank and Kingdom Bank to the huge profits posted by top tier banks Standard Chartered Bank, CBZ Bank and other mid tier banks.

Whilst there is a general consensus that banks have become quite profitable again starting in 2011, there is ongoing analysts’ discourse and open disagreement on a few key issues.

One contentious question revolves around the quality of earnings, particularly for those banks whose revenues were driven by increased interest income from aggressive lending, whilst another school of thought is questioning the sustainability of banks growing their non-funded income streams — fees and commissions– in an environment where there are many players and fewer customers.


The apparent increase in bank profitability in 2011 can thus be partly attributed to banks ‘’making hay whilst the sun shines’’ as it is quite clear that that recent “super profit’’ trends are not sustainable into the future. Not only will interest margins be pressured downwards in the next 12-24 months as liquidity improves and banks face moral pressure to lower lending rates, but the increasing spectre of competition in the sector will inevitably lead to banks reviewing their service charges to retain existing clientele and to attract customers from their competitors.


More importantly, banks will actively seek to get back the previously banked population who have run away from formal banks due to perceived heavy service charges and transaction fees, and also to attract the unbanked segments who are presently estimated to be sitting on  upwards of US$3 billion in “mattress money’’.


Banks should therefore be bracing themselves up for  significant increases in effort and investment in marketing and channel development to attract business as well as increases in attendant costs of doing so, that will eat into revenue.

Whilst aggressive lending has seemingly paid off for CBZ Bank in 2011, analysts have criticised its strategy and blamed it for the liquidity challenges it faced at the end of last year. The bank attributed the problems to increased high value activity on key accounts at year end, which was aggravated by lack of a lender of last resort in the market.


A plausible argument yes, but the bank subtly admits the analysts’ criticisms by announcing that it will not grow its loan book by more than 5% going forward in addition to implementing strategies to improve liquidity. Given its size and huge customer base, CBZ should also ramp up its non-funded income streams and push its non-funded to interest income ratio, presently at 39%, up to about at least 80% to compensate for the anticipated decline in interest income growth.

Analysts have also challenged CBZ’s low provisioning, arguing it should be higher, given prevailing risks inherent in the lending market, which are increasing.

Standard Chartered Bank’s results were  driven mainly by non-interest income, a very small proportion coming from lending.  The bank operated on a smaller capital, asset and deposit base than CBZ and it is clear that Stanchart’s appetite for new loans was low, with a 7% growth on its loan book from US$109 million to US$117 million. However, the bank seems to extract maximum value from customers via service fees and other charges as these contributed a staggering US$37 million revenue. 

At Cabs fees and commissions of US$18,1 million were earned, but interest income contributed 57% of total revenues, signalling a return to core lending business, which saw loans and advances increase a dramatic 813% from US$21,3 million at 30 June 2010 to US$194,5 million as at 31 December 2011. 

Non-interest income growth was on the back of increased transaction volumes across the institution’ extensive branch network, whilst the phenomenal 139% rise in totals assets was driven by a growth in deposits of more than 163%.

Another traditional player, MBCA Bank seemed to follow a conservative strategy very similar to Standard Chartered Bank. Interest income growth was flat, as lending was static, whilst significant growth was recorded in fees and commissions, which became the key driver of the bank’s gross and net profits of US$19 million and US$3,4 million respectively.

Analysing the results of TN Bank, BancABC Zimbabwe, ZB Bank, Metropolitan Bank and NMB reveals a similar pattern where growth in lending activities impacted positively on interest income. POSBs modest 20% in income is admittedly due to increased lending and customer growth.

Stanbic Bank’s results also show active lending as a key contributor to revenue. Net interest income at US$25 million was 45% of income, whilst fee income of US$24 million, represented 43% of total income. On balance, it appears bank revenues were driven largely by interest income from increased lending. This is noble, as it endeared the banks to lending customers in an environment where liquidity is tight and for most of the smaller banks, a credit-led customer acquisition model where a bank offers easy access to loans in exchange, hopefully, for customer loyalty in the long term made a lot of sense in 2011.

Nevertheless, it has dawned on most banks that they cannot lend with impunity in an environment where risk of default has become very high. A popular saying in banking goes, “any fool can lend’’, but it’s the quality of the loan book in the end that will separate the “men from the boys’’.

Banks also generally got better at managing their costs in 2011, with almost all banks’ cost to income ratios trending downwards. Cost pressures from human resources however remain high and banks need to continue to rationalise staffing requirements. On the whole, the banking sector remains vulnerable to the unfolding credit crunch. With virtually all banks announcing that they will be lending less going into 2012, there will certainly be more liquidity challenges in the broader market as new loans become less accessible to businesses and individuals.


The sector has to brace itself for major write downs on the lending book in 2012 and perhaps into 2013. The banks that have developed strong non-funded income streams and quality credits will likely pull through, given that once a bank has earned fees, they are truly earned, whereas on the lending book, both the capital and anticipated income are at risk.