Source: Banks experience income erosion after interest cuts | The Financial Gazette August 31, 2017
Most banks faced a challenging first half as total income slowed down as a result of interventions by the RBZ.
THE banking sector has reported depressed first half incomes on the back of a central bank directive that capped interest rates and transactional charges.
However, a surge in transactional volumes has seen non-funded income offsetting the effect of the decline of both lending and interest income. The velocity of transactions has been quickened by a bank note shortage, which intensified in the first quarter of 2016.
Out of the 19 local banking institutions, 10 have so far reported that a combined $17,3 million has been lost in net interest income as banks adjust to the new transactional charges and interest rates. Coupled with this, fee and commission income was also hit.
While the banks in question recorded a combined income of about $281,7 million in the first six months of 2016, the figure slumped three percent this year as Reserve Bank of Zimbabwe (RBZ) governor John Mangudya’s restrictions began affecting incomes.
Mangudya directed all banking institutions to set lending interest rates at 12 percent or below and keep bank charges below three percent.
Lending rates have come off from levels around 20 percent three years ago to the current average of seven percent for corporate borrowers and nine percent for individuals.
As nine more banks are yet to report for the six months period, market watchers forecast subdued growth in income as banks adjust to more conservative fees. The sector’s average maximum effective lending rate dropped 3,8 percentage points to close the first half at 11,9 percent.
Economist, John Robertson, said most banks were going to report depressed incomes on the back of the central bank’s intervention.
“They have been making a killing from high interest rates, but you will likely see most recording lower incomes this year after Mangudya’s cap. However, this will also lead to reduced lending and for those clever enough to tap into electronic channels, it will lead to more diversified income streams,” Robertson said.
Equities research firm, IH Securities, also indicated that the central bank’s directive had impacted on revenue streams in the banking sector.
“Most banks faced a challenging first half as total income slowed down as a result of interventions by the RBZ. This resulted in most fees and commission incomes declining. The sector, as a whole, faced a challenging first half as the capacity to grow the loan book continued to decrease while incomes were dampened by the RBZ directive to reduce fees and lending rates.
“We expect the main revenue driver going forward to be non-interest income, headed by fee and commission income as we expect the higher volumes to compensate for the lower prices. Interest income, in our view will remain compromised as we expect the loan book to remain subdued. We believe fee and commission income will improve in the second half on the back of higher transactional volumes,” IH Securities said.
FBC Bank recorded a four percent total income decline during the first half of the year, from $46,6 million to $45 million, as net interest income declined seven percent to $21 million. Net interest income constituted 47 percent of the bank’s total income, compared to $22 million or 48 percent during the comparable period the previous year.
“The group’s total revenues decreased by four percent to $45 million, from $47 million for the same period last year. This was largely impacted by the central bank’s directive to cap interest rates and transactional charges to prescribed lower levels with effect from 1 April 2017,” Herbert Nkala, chairman of FBC Holdings, which owns FBC Bank, said.
He pointed out that due to the central bank’s directives, the bank had also incurred an increased interest expense as the interest cap on lending was not matched by a corresponding decrease in deposit rates, which culminated in a reduced net interest margin.
NMB Bank reported a 35 percent increase in after-tax profit in the six months to June to $3,6 million, despite an eight percent drop in gross income.
But total income slipped to $23,9 million during the reporting period, from $26,1 million during the comparable period the previous year, mainly due to lower interest income.
State-owned POSB also reported an income decline as net interest income decreased eight percent from $7,19 million during the comparable period the previous year to $6,62 million during the reporting period.
Interestingly, other institutions like Ecobank Zimbabwe more than doubled their income on the back of an increase in electronic transactions.
The Pan-African bank’s total operating income increased to $25,5 million from $12,5 in prior comparable period, driven by a surge in both funded income and non-interest income. Net interest income was up 70 percent to $12,9 million, while non-interest income rose 43 percent to $10,1 million.
Also on the positive side of the spectrum was Barclays Bank of Zimbabwe, which registered a profit after tax of $9,5 million as all income lines showed improvement on prior year.
CBZ Bank also recorded a total income improvement to $80,4 million from $74,1 million recorded during the first half of 2016. However, interest income was down to $81 million from $89,2 million, while net interest income marginally rose to $39,6 million from $38,6 million.
Prior to the announcement, lending interest rates were determined by a framework allowing banks to charge between six and 18 percent, depending on the client’s risk profile.
The World Bank recently predicted that the RBZ’s measures were set to eat into the sector’s profits and growth prospects as local banks strive for survival in an increasingly fragile economy that has also seen numerous company closures and low industrial activity.
Noting that financial sector growth was anticipated to slow down to 1,7 percent after banks recorded a 42 percent profit surge last year, the World Bank said the slowdown would be on the back of regulatory interventions.
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