Banks not generating ‘super profits’

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Clive Mphambela
SHORTLY after many banks released positive half year results, they immediately came under fire for reaping massive profits whilst the rest of the economy is struggling to stay afloat.  
The banks have been accused of paying paltry interest on savings whilst levying exhorbitant account maintenance fees; actions that are seen as working against the need to grow national savings through the banking sector, which is critical to mantaining liquidity in the economy.

 
The reluctance by banks to pay real returns on savings, coupled with high administrative charges that eat into the savings, have been singled out as the two major drivers of depositors away from the formal banking sector, a situation that has prompted authorities to threaten banks with legislated interest rates and bank charges.

 
However, economists and banking analysts interviewed by businessdigest this week said whilst banks were making rising profits, there were numerous factors that supported the view that banks in Zimbabwe were in fact not profiteering.
Eric Bloch, a leading Bulawayo- based economic analyst, said although banks were now achieving profitability, the returns they were making were below the Return on Capital Employed (ROCE) required to remain sustainable.

 
“Their ROCE is less than regional and international comparisons and therefore they cannot be earning supernormal profits,” Bloch said in an interview.

 
“I do not agree with the view that banks are presently making super profits. In fact, when one looks at the risks that the banks are taking, the returns they are making are misaligned with the risk levels at which they are operating. The quality of bank earnings in Zimbabwe is therefore questionable as I do not believe they are making an economic profit to cover all their costs, including the economic risks they face,” he said.

 
University of Zimbabwe economics professor, Tony Hawkins, argues that bank profits at current levels may not be sustainable into the future.

 
“Firstly, the economy has been growing pretty rapidly since 2009 and so have bank deposits (represented by money supply), which have also grown rapidly from basically zero to over US$4,0 billion currently. The growth in bank earnings going forward depends in part on how they adjust to the slower growth in the GDP and money supply. From that view point, banking assets and profits are unlikely to grow at the same rate that these metrics have grown since 2009 and we should expect lower average earnings growth,” Hawkins said.

 
He said insofar as the quality of earnings was concerned, it was unadvisable to average out bank performance across the market but to instead look at the quality of assets and earnings of individual banks. This, he said, was because there were clearly some successful banks in the market and some not so successful ones.

 
Hawkins said banks in Zimbabwe were not generating “abnormal profits”.
“I do not subscribe to the notion that banks are overcharging customers. People must understand that the Zimbabwean economy has a very high cost structure and bank charges are high simply because costs are high,” he said
The economics professor said it was difficult for anyone to argue that banks were overcharging on interest rates in an economy where there was no benchmark interest rate.

 
“Firstly, in the absence of an active money market on the back of a central bank benchmark rate as a lender-of-last-resort, it is pointless to try and prove that any bank is overcharging on its interest rates,” Hawkins said.

 
“One also looks at the fact that bank lending has been growing at a very fast rate since dollarisation and this would not happen if interest rates were too high as alleged.”

 
Hawkins believes that banks are making an adequate return on capital and will continue to do so as evidenced in the interest by both local and foreign investors in putting money in the local banking sector. There has been a keen interest in Zimbabwe’s banking assets.

 
The professor supported the new capital thresholds, saying they were necessary to restore confidence in the country’s banking sector.

 
“Increased capitalisation will make the banking sector more stable and thus attract more money from depositors, who are shunning banks because of perceived weaknesses. Of course there are those that are avoiding the formal banking channels to evade tax but the majority of people out there would like to deal with formal banks,” he said.

 
In addition to the mattress money that was circulating outside banking channels, Zimbabweans domiciled outside the country could repatriate their funds if local banks were seen to be stable.

 
“Interest rates in Europe and elsewhere are also very low and savers get nothing by way of interest rate returns. There may be some attraction to deposit money locally if Zimbabwe banks are strong,” Hawkins said.

 
The latest figures on bank profits are open to different interpretations. MBCA Bank’s after tax profit  grew 344% in  the half  year ended June  30 2012, largely driven by an increase  in gross operating income and  effective  cost containment measures that saw its cost-to-income- ratio  decrease  to  74% compared to 92% recorded  the first half of 2011.

 
Interest income was a key driver of the more than 25% growth  in operating  income.

 
MBCA Bank’s non-interest  income  surged 21% to US$156 million   in  response  to the  growth  in transaction volumes resulting in increased  agency  commission  fees.

 
CBZ Holdings (CBZH) reported total income growth of 17% for the half year ended June 30 2012, at US$64 million from US$54,8 million the same period last year.

 
CBZ reported a 26% rise in net interest income from US$33,6 million to US$41,4 million which resulted in the reported 33,6% rise in net profit to US$18,3 million in the six months to June 30 2012.

 
CBZ said earlier this year that its banking subsidiary would not grow its loan book by more than 5% in 2012.

 
Barclays Bank Zimbabwe Ltd reported a reduced profit before tax of US$831 000 for the half year to June 2012, after its costs rose ahead of income. The bank had posted US$910 000 profit in the first half of last year. The bank said underlying costs had gone up by 14% on a year-on-year basis whilst income had risen by 13%.

 
Barclays alludes to the high cost of doing business in Zimbabwe as a major driver of lower profitability levels.

 
Liquidity levels are improving as banks continue to re-align their loan-to-deposit ratios to meet the demands for profitability whilst balancing off the need to remain liquid.

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