THIS year’s edition of the Banks & Banking Survey comes at a time when many policy changes have been effected and these have had a fundamental impact on banking sector performance. The most pertinent changes include the scrapping of multi-currency in June, which followed liberalisation of the exchange rate in February and separation of nostro accounts in October 2018.
This shift, effected through Statutory Instrument 132 of 2019, has had a distortive effect on earnings presentation through the inflation of assets and income. For the purpose of this survey, Equity Axis relied on hard data and utilised appropriate discount factors where necessary to establish relative performance across banks.
The methodology applied has a bias towards fundamental ratio analysis looking at asset quality, capital adequacy, earnings and liquidity. This analysis is adjusted for the effects of changes in currency and inflation. It is apparent from this survey that although all banks reported positive and improving face value earnings, the weakening exchange rate reduces the purchasing power of the earnings in real terms.
Most income lines, therefore, show slow to negative growth when adjusted for inflation. Banks have not been responsive in terms of adjusting interest rates and fees on transactional business to counter the impact of inflation. This is mainly because of industry regulation which is guided by the central bank.
Banks were only able to adjust interest rates and fees in the second half of the year following a revision of the overnight lending rate by the Reserve Bank and allowance to adjust fees accordingly. The full impact of this move will be felt in the second half of the year. On balance sheet strength, the survey observed that all banks benefited in asset revaluations consequent to shifts in currency as Zimdollar valuations are higher in absolute terms (note that SI23 compelled reporting entities to report at par 2019 numbers to those of 2018).
Balance sheets are therefore showed at artificially higher levels although this was moderated at ratio level.
Asset strength was broadly weaker owing to high probability of loan non- performance and increased exposure to sovereign paper, particularly going into the second half of the year.
Capital adequacy remains a challenge, considering the growing risk of banks’ fragility in the weakening macro-economic environment. Deposits generally presented a quicker growth to capital which is, of course, following on profitability, but at a slower pace to deposits.
Banks need to buffer their capital positions and hedge against contagion as yesteryear hyperinflationary risks make a dramatic comeback.
This survey concluded that a majority of the banks are not prepared in the event that risks spiral out of control.
The survey also delved into qualitative aspects to support a usually relied upon but sometimes distorted field of hard numbers.
Globally, there is strong emphasis on sustainable business and this entails focussing on corporate social responsibility. All banks in Zimbabwe are undertaking investments in communities they operate, helping the less privileged and vulnerable groups, building infrastructure, investing in education, health and agriculture, among other endeavours.
Although all banks demonstrated total commitment to this pursuit, we singled out one player for purposes of awarding, based on the merits of capital committed. The survey also undertook to reward innovation in banking, an area which is receiving unusual attention globally.
The focus on innovation is intertwined to digitisation, which has become the nucleus for non-funded business. It is an interesting observation from these results that the fee and commission income now surpasses funded income in terms of contribution to total income. Split between the two, funded income now accounts for 44% while fee and commission now account for 56% of income that is after adjusting for other lines of income such as forex dealings and fair value adjustments.
Banks that are highly innovative had a superior value proposition to customers and thus are able not only to amass new customers but to create an ecosystem within their network which allows for value retention on seamless services within the created ecosystem, a creature of innovation.
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