ZIMBABWE’S banks face multiple pressures, including potentially damaging high default rates and Covid-19-induced storms, as they negotiate their trickiest phase since the domestic financial crisis a decade ago, a sector report has warned.
In a series of reviews and predictions, the Reserve Bank of Zimbabwe (RBZ) and financial sector CEOs had until now projected a V-shaped recovery in the aftermath of the pandemic, that is a short, sharp slide followed by a bounce back to pre-virus level lending.
In a way, these projections have taken place in some banks, as reported by CBZ Holdings, Zimbabwe’s largest banking group on Tuesday.
But in a sobering analysis, the authoritative Banks&Banking Survey (BBS) predicted this week that the virus-induced slowdown, which added to an already fragile terrain, will be followed by a painfully slow recovery potentially highlighted by high non-performing loans (NPLs) that could trend towards the red zone.
The report said these will be underpinned by a string of factors, including the resurgence of the previously free-falling Zimbabwe dollar and tepid growth in hardest-hit but vital economic sectors like tourism and logistics.
The BBS warned that in the age of the coronavirus, banks that will lend recklessly will fall into a vicious trap.
Bank CEOs are probably aware of the hard knocks ahead. But they have already injected $18,35 billion (about US$22 million) to prop up failing firms since the virus exploded in March.
While these interventions may have been to their most reliable clients, the report warned financial institutions to pursue an extremely cautious step to skirt risks, as the storms are still lurking.
“Pockets of risk are growing,” the BBS, a product of the Zimbabwe Independent, in partnership with First Capital Bank, said.
“Though officials reported aggregate banking soundness, indicators do not raise major red flags, they mask vulnerabilities specific to a dollarised system hence the need for dual lending. Likewise, a significant variation in prudential indicators across individual banks is key. (For instance) as the local currency appreciates, there is a danger that borrowers will struggle to repay loans leading to banks sitting on huge NPLs,” it warned.
It challenged the RBZ to scale up its monitoring and evaluation antennas in the coming months to assure the markets of a stable financial system as banks negotiate a completely new terrain.
The scenarios coming out of the survey are not new to the Zimbabwean financial landscape. Banks were roiled by pretty much similar storms during the first phases of dollarisation after pumping at least US$1,8 billion into the economy between 2009 and around 2012 at punitive interest rates of up to 44%. They soon hit a dead end.
Borrowers ran out of capacity to service loaned out funds, with dreadful consequences. An already huge graveyard of failed banks that had collapsed at the height of terrifying failures between 2003 and 2008 expanded, and some of those that avoided collapse still nurse the scars.
This was how the Zimbabwe Asset Management Corporation (Zamco) came to the scene.
Central bank chief, John Mangudya established Zamco to take over toxic debts and avoid potential contagion by lifting the burden off financial institutions, while collections war raged elsewhere.
The survey makes a list of potential candidates to give banks headaches but emphasises these will still require funding to return to full production only after careful planning by lenders. The survey come short of saying the pandemic is not a crisis of their making, but a natural phenomenon that has been felt everywhere.
This could possibly be where government’s hyped $18 billion (about US$220 million) bailout would come in handy for the hardest hit firms. But the state has only made preposterous promises without action.
“Institutions at risk include those with hard currency, short-term funding on inter-bank liabilities, or those with high concentrations in sectors particularly affected by Covid-19 shock such as tourism, hospitality, and transport,” the report said.
“Such problems make a credit crunch likely, with sharp reductions in new lending and hoarding of liquidity and capital. For banks, lending in a shifting terrain requires creative approaches in acquiring and utilising high frequency data in assessing models of firms and households. Zimbabwe is currently facing its worst economic crisis in more than a decade, with skyrocketing inflation of 659, 4% year-on-year in September, and acute shortages of foreign currency, food, and medicine. Are banks poised to withstand the test of time any longer?”
“The operating environment is envisaged to remain challenging and highly uncertain, a situation that makes it difficult for banks to assess their outlook inherent risk. Adaptive public and investor confidence in the financial sector have hit rock bottom, worsened by synergies of signals of uncertainty across other key sectors of the economy. More importantly, cost-to-income levels for the banking sector have remained high, while the major component of income has shifted from interest income to non-interest income. There remains a high probability of adverse shocks to this profit function. The somewhat stabilising exchange rate will reduce exchange valuation gains, while economic slowdown will negatively impact on profitability,” it noted.