‘Banks outlook gloom’: BMI

Source: ‘Banks outlook gloom’: BMI | The Financial Gazette September 15, 2016

ZIMBABWEAN banks are likely to tighten lending over the next two years as the quality of borrowers continues to deteriorate, an international advisory firm, BMI, said last week.

BMI said liquidity challenges facing the banking sector, adverse weather conditions that have crippled the key agricultural industry and general sluggish growth would continue to hurt the financial services sector.

“An ongoing shortage of liquidity, poor investor sentiment and adverse weather conditions mean we expect only a slow recovery,” BMI said.

Banks have also been affected by high levels of non-performing loans (NPLs).

NPLs were estimated at 20 percent in 2014, but declined to 11 percent at the end of last year, after the Reserve Bank of Zimbabwe (RBZ) established the Zimbabwe Asset Management Corporation (ZAMCO) to purchases toxic loans.

BMI said banks had tried to mitigate losses by factoring in a risk premium but the RBZ intervened with interest rate caps now expected to affect the banking sector’s top lines.

“Banks face a lack of viable borrowers, and while they have maintained high interest rates to price in some of the risk of lending in a weak economy, they are under constant pressure to lower them from the Reserve Bank of Zimbabwe,” BMI added.

It warned that despite the positive outlook presented by authorities, banks were likely to register tepid growth during the next two years.

Lack of trust has been building in the banking system since depositors lost fortunes at the height of the banking crisis, which reached tipping point 2004 and 2005.

The appetite for deposits was therefore likely to remain subdued due to diminishing confidence in the financial system.

Zimbabwe, which uses the greenback as the major medium of exchange in a multicurrency system introduced in 2009, is expected to introduce US$200 million worth of bond notes before year end to fund a five percent export incentive for exporters.

The planned new currency has already further hurt market confidence.

Depositors fear that their hard currency balances in banks would be converted to bond notes, although authorities say they will not do that.

As a result of the suspicions, depositors have been shunning the banking system.

Reports say over US$7 billion was already believed to be circulating outside the banking system since dollarisation in 2009.

“This view is largely grounded on the unstable climate in which banks now find themselves in. The Zimbabwean economy has been in a state of decline over the past five years, culminating in a recession in 2015, when we estimate the real gross domestic product contracted by 1,4 percent. Balance sheets in Zimbabwe’s banking sector will record slow growth over the next two years as a lack of trust within the wider population and a weak economy will see little appetite for either loans or deposits,” BMI added.