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MoU affecting banks’ income

The June reporting season for 2013 has just kicked off, coinciding with the election of a new government.

Victor Makanda

So far there have not been any surprises in the performance of companies that have published their results.

Much of what was published was as expected and reflects the difficult economic environment in which companies are operating.


Economic growth is contracting as evidenced by the further downward revision of GDP growth forecast to 3,4%, from 5%, by the Ministry of Finance.

The reasons advanced for the downward revision were the slowdown in all economic sectors, particularly in mining, which contributes more than half of the country’s exports.

Liquidity has tightened further due to the uncertainty on the political front since the announcement of election results. It therefore means the outlook for corporates remains dim. So, even though the reporting season is not yet over, it is highly unlikely that there will be any surprises.

So far, banking institutions that have published their results are ABC Holdings Limited (ABCH), FBC Holdings Limited (FBCH), Barclays, ZB Financial Holdings Limited (ZBFH), CBZ and MBCA.

Although these banks remain profitable, performance could have been better were it not for reduced income emanating from the Memorandum of Understanding (MoU) signed between banks and the Reserve Bank of Zimbabwe (RBZ), to reduce interest rates and bank charges.

The MoU took effect on February 1, 2013 and from the results published, total income grew at a slower pace compared to the previous period.

The Bankers Association of Zimbabwe (Baz) hinted early this year that the sector was likely to lose US$40 million in income on an annual basis.

From the results published, CBZ’s total income rose by a muted 8% to US$69,19 million. Net interest income grew by 6% to US$43,92 million compared to a 23% growth that had been recorded in the prior year. Non-funded income at US$21,35 million increased by only 4,95% owing to reduced transaction charges.

Management at CBZH termed it “the downside effect of the MoU” due to lower growth rates relative to prior years.

ABCH was also not spared, especially on fee and commission income, which declined by 19,99% to US$7,56 million, down from US$9,39 million in the prior period, partially attributable to the MoU.

Net interest income, however, at US$23 million, was up 78% as the bank continued to increase consumer lending. Overall, total income rose by 10,8% to US$27,77million, with growth likely to have been higher were it not for the deceleration in non-funded income.

Barclays Bank registered a marginal 2% growth in non-funded income at US$13,74million. In the same period last year, the bank had registered a 7,1% growth, signalling the downside impact of the MoU on transaction charges.

Total income, however, was up 10% at US$19,29 million as net interest income grew by 34,73% to US$5,77 million due to the increase in loan disbursements.

Total income for FBCH grew a marginal 0,2% to US$36,80 million compared to US$36.7 4million in the previous period.
Net interest income only grew by 5% to US$9,86 million. Growth in net interest income would have been more.

This is because interest expense growth of 14% exceeded the 9% growth in interest income. In addition, fee and commission income grew a marginal 2% to US$11,47 million from US$11,29 million in the previous six months.

For FBCH, transactional volumes were subdued while the capping of deposit rates partially ate into the group’s net interest margins. Worth noting is that FBCH’s management hinted at the company’s analysts’ briefing that they had sacrificed almost US$2,5 million due to the MoU.

ZBFH also felt the impact of the MoU as its interest expense grew by 6,6% while interest income declined by 1,3%. This saw net interest income declining by 6% to US$10,62 million. Fee income rose by a marginal 0,15% to US$19,12 million.

Overall, ZBFH total income growth of 20,21% to US$36,20 million was driven more by the 34,52% growth in insurance business and a fair value gain compared with interest income and non-funded income.
Based on the negative impact the MoU is having on banks’ income, there is a need for banking institutions to be more innovative as a way of diversifying their income streams.

Interest income growth may be subdued further due to the fact that most banks have curtailed lending as most loans have gone bad. According to the RBZ, non-performing loans for the sector were reported to be at 13,78%, way ahead of the 5% stipulated by Basel II requirements.

In addition, there is general consensus that even the 13,78% is understated. Under such a scenario, growing the loan book to boost interest income would be risky due to the high possibility of default.

However, for banks able to secure lines of credit, growing interest income will go a long way to lowering their overall cost of funds and ultimate profitability.

Going forward, it will be increasingly difficult for banks to meet the required capital threshold through retained earnings. It therefore means that outside capital injection is the way to go. This channel has also been a challenge due to the increasing country risk at a time when elections have been disputed.

Overall, with rising operating expenditure, slowing income growth and deterioration in asset quality of most banks, the outlook for the sector normally regarded as the intermediator in economic activity looks set to remain depressed.

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