Zimbabwe’s banks posted a startling 42 percent surge in profits that buttressed economists and investors’ belief that “unacceptable charges” and “extortionist fees” were reinvigorating the long-struggling financial sector.
The super profits announcement was immediately followed by an announcement by Reserve Bank of Zimbabwe (RBZ) governor John Mangudya in his 2017 monetary policy statement that he had capped interest rates at 12 percent per annum from 18 percent and further reduced bank charges.
Banks have reneged on past pledges to the RBZ to lower their rates, which had given Zimbabwean lenders one of the highest returns-on-equity in Africa.
Businesses in the country have long complained that high commercial lending rates, which average 18 percent or more, hobble corporate investment, while individuals say the high cost puts borrowing out of reach of many.
Financial institutions quote high lending rates even on struggling civil servants despite getting cheap funds from State-run pension fund, Nssa.
The super performance of banks was largely in line with what economists had been expecting: trading revenue was upbeat thanks to increased market activity following the introduction of bond notes; and a recent upward move in interest rates produced remarkable gains in banks’ income.
At a time most Zimbabwean businesses are closing shop on the back of perennial losses driven by economic collapse; just in the first half of 2016 alone, banking sector profitability jumped to $181 million from $127,4 million.
In fact, all of the country’s 19 banking institutions — 13 of which are commercial banks, five building societies and one savings bank — recorded profits, with an improved average return on assets from two percent to 2,2 percent, while return on equity also went up from 11 percent to 12,6 percent.
This performance by the banks comes at a time when the country is experiencing acute cash shortages caused by withdrawal limits, consequently leading to numerous withdrawals by depositors and translating to more income for banks from ATM fees and other withdrawal charges.
Mangudya said interest income continued to be the major income driver constituting 58,4 percent of total income of $1 billion for the period under review.
Former Finance minister, Tendai Biti, said: “They are making super profits because they have unacceptable charges and extortionist fees… But it is not their fault.
“The real issue is that banks are not operating normally. They do not have good bank assets.
“They cannot lend to businesses because they have collapsed, they cannot lend to farmers because farmers do not have title deeds…
“So, in the absence of a regime that can help them make money normally through interest income and lending to good clients, they make money from non-interest income and they are in a rut because they still have to remain in business,” Biti said.
He pointed out that the central bank and Treasury still needed to put in place a statutory instrument to closely monitor banks and charges being levied on depositors.
“They will simply not comply despite the slash in withdrawal rates, unless a statutory instrument is enforced to monitor them and deal with the challenges.
“The problem is that banking is an accounting-based sector and they will always make use of creative accounting to pass costs to depositors,” he said.
The profits naturally surprised most depositors, given the country’s economic collapse.
Harare-based depositor, Karen Mutandwa told the Daily News on Sunday: “Doesn’t it just come as a shock that banks are the only sector of the economy that is flourishing? Clearly, they are benefitting from our misery.
“If they are not lending as much as they used to, then where is the interest income coming from?
“Someone is making a killing in these tough times and someone is not telling the truth,” she said, standing in a bank ATM queue.
Harare-based economist Issis Mwale said it was a no-brainer that banks were going to record higher profits in 2016 in spite of worsening economic conditions, adding the banks were “cashing in on cash scarcity”.
“Can’t you see? Because there is no cash, people are withdrawing more money and because of this, they incur more in withdrawal fees.
“Cash shortages did affect banks, but they also benefited the most as their depositors kept withdrawing and performing other functions.
“It is a simple matrix really. But I doubt this year will be great for them, given withdrawal fees were slashed,” Mwale said.
Bankers have said the RBZ’s newly-introduced withdrawal charges are anticipated to eat into income, with some pointing out financials were set to reflect the effect in the first half of 2017.
In his monetary policy statement, Mangudya said: “With effect from 1 April 2017, all banking institutions are required to ensure that lending interest rates should not exceed 12 percent per annum and that bank charges that include application fees, facility fees and administration fee, should not exceed three percent.”
Well placed bankers said the new charges — introduced in line with cash shortages afflicting the economy — were going to eat into profits as most local financial institutions had recorded increased withdrawal traffic due to the present cash challenges.
“..this will definitely eat into income in the medium term. I am sure the first half of 2017 will have the extent to which the new charges will affect local banks…” a banker, who spoke on condition of anonymity, said.
Prior to the country’s cash shortages, banks were charging $2,50 for ATM withdrawals and about three percent of the withdrawn amount for cash withdrawals inside banking halls.
However, the RBZ, much to the relief of most depositors, ruled that cash withdrawal charges be lowered.
The new ATM cash withdrawal charges include $0,50 for $50 and $5 for $500, while over-the-counter withdrawals from banking halls are charged at $0,25c for $20, $0,63 for $50 and $2,50 for $200.
While cash withdrawal limits had been reduced significantly, there has not been a proportionate reduction in the levels of bank charges for the major part of 2016.
The country has been using a multi-currency regime backed by the US dollar. Calls for the adoption of the rand have been rejected by the government.
The current dollar crunch has affected businesses, with companies unable to pay for crucial imports such as raw materials and equipment for production.
Equities group, IH Securities cautioned of a turbulent year for banks on the back of government’s failure to contain expenditure, despite the fantastic financials recorded in 2016.
“Confidence in the sector is faltering, the sector is becoming a concern…
“On the surface the financial sector remained somewhat resilient in 2016 despite clear headwinds in the form of growing exposure to Treasury Bills, uncertainty around bond notes and a decline in quality borrowers under the economic circumstances.
“We are wary of the financial sector as balance sheets become heavily exposed to Treasury Bills and as cash balances begin to lean towards bond notes relative to hard forex,” IH said in its 2017 equity strategy paper.
In 2016, total banking sector deposits increased by 6,1 percent, from $6,1 billion as at September 30, 2016 to close the year at $6,5 billion.
The commercial banking sub-sector accounted for 82 percent of the banking sector deposits and 74,1 percent of the total banking sector loans as at December 31, 2016.
Banking sector deposits were dominated by demand and time deposits, which accounted for 54,6 percent and 26,8 percent of total deposits, respectively, as at December 31, 2016.
In the year under review, the average prudential liquidity ratio for the banking sector was 61,9 percent, above the stipulated minimum regulatory requirement of 30 percent.