The December reporting season is one of the busier and informative periods for the investment community.
This period serves as a gauge for company performance and, by extension, the broader economy.
Further to this, it gives a snapshot of the current and likely future performance of the banking sector.
The key highlights from the financial results published so far for banking institutions relate to rising loan impairments and reduced income due to the impact of the provisions of the Memorandum of Understanding (MoU) that was signed by banks with the RBZ.
Total income for banking institutions will most likely be subdued going forward despite the cancellation of the MoU by the central bank.
To put things into perspective, the MoU came into effect on February 1, 2013. The MoU required, among other things, that lending rates be capped at 12,5% above each respective bank’s weighted average cost of funds.
Banking institutions were also ordered to charge up to 0,5% on cash withdrawal amounts subject to a minimum charge of US$2,50 while ledger fees, maintenance and service fees were expected to pay up to US$4 per account.
The central bank and bankers also agreed to push for the mandatory use of debit cards. On November 29 of the same year, the RBZ repealed the agreement effective December 1, 2013.
Further to this, the regulator, at the end of January 2014 advised banking institutions to justify any increase in bank charges in writing and seek permission for them from the RBZ.
Questions have been raised on whether this is not a form of price control for the sector and if that is the case, how it will impact on the operating environment for the sector and survival of banking institutions.
Commenting on the MoU, one executive at an analysts’ briefing held last month said; “We had the memorandum of understanding being cancelled. Further to this the RBZ now require us to seek permission to raise bank charges and interest rates.
It effectively means that the written form of the MoU was cancelled in November last year but an unwritten form of the MoU was subsequently effected because what the Reserve Bank is saying to us is if you want to increase your bank charges you need to write and seek permission from us. This reminds me of the price controls during the National Incomes and Pricing Commission (NIPC) era.
It is quite worrying that we have such kind of price controls in the banking sector.” The statement reveals the general sentiment among banking institutions concerning the MoU and this literally means that non funded income (NFI) will remain subdued as it was in 2013. Subdued NFI growth may then likely result in limited growth of total income considering that most institutions will be pursuing cautious lending into the future thereby restricting interest income growth.
Market efficiency which arises in every market where prices are determined by the forces of demand and supply will most likely not be achieved under such an agreement.
This will only lead to customers benefitting whilst disadvantaging banks.
Whereas these controls in the short term may be circumvented, in the long run banks may possibly feel the full impact of such controls through depressed or declining NFI.
The general view is that the central bank and policymakers who have been crying foul over high bank charges may need to focus on addressing the real reasons why bank charges are being increased rather than just enforcing price controls.
Such a view may be the optimum way of addressing the debate on high bank charges as most institutions have been offering these high rates in the light of their huge cost structures.
Thus formulating ways to assist banking institutions to lower their cost structures will go some way in coming up with a “win-win’ situation for banks and customers.
Notwithstanding the overall impact of the MoU on the sector, the recent intervention by the RBZ will worsen the operating environment for indigenous banking institutions. The sector which some regard as overbanked has since 2009 been propelled by growth in non-funded income compared to interest income.
With the huge credit risk in the sector reflected by an average non-performing loans (NPL) ratio of 15.92%, small banks will most likely struggle to grow their income. This is because most of them no longer have the capacity to grow interest income due to huge non-performing loans.
Furthermore, the flight-to-quality has seen most depositors and potential customers preferring international banks to indigenous banks leading to reduced activity among the latter.
Thus with reduced lending capacity in a high default environment and flight to quality, small banks will struggle to grow total income especially those with inefficient costs structures, high costs of funding and significant non-perfoming loans.
Trends in the mobile banking space have also not spared banking institutions irrespective of their size.
Competition has been on the rise with all three mobile network operators offering mobile banking services. Banking institutions have not done great work in grasping technological trends and this has seen most of them losing market share and possible sources of income.
Further to this, lack of adequate capital has also resulted in banking institutions failing to take advantage of recent technological innovations and ideas. This slow uptake has resulted in banks failing to lower overall costs. With most institutions trying to play catch up with these trends, growth in income will remain limited.
Overall, the so called unwritten implications of the MoU will not aid growth in NFI.
This will result in limited total income growth. Assuming banks do not find ways to streamline their costs structures then the sector average cost to income ratio which stood at 80.8% according to June 2013 financial results, will worsen. A worsening cost to income ratio will either reduce profitability or lead to losses being recorded.
Alternatively, the MoU may force small banks with inefficient costs and high cost of funding to either close, downsize or pave way for consolidation. Policymakers may need to find ways to continuously address the major ills within the sector particularly high costs of funding, declining depositor base, persistent liquidity shortages and price controls. Banking institutions on the other hand need to find ways to streamline their operations whilst being innovative.