Bank bubble bursts as economy tanks

The earnings season is here, especially for those companies listed on the Malawi Stock Exchange (MSE) and some financial houses who may be required by regulation to publish their financial results.

The most interesting financial reports are from the hitherto super profits crowd: banks. Most of them have either posted drastically reduced profits or recorded outright losses. What does that bode for the economy?

For example, FMB profits dipped to around K2.48 billion during the January to June 2016 period, lower than the nearly K3.6 billion registered over the same period last year.

Dual-listed multi-sectoral conglomerate Press Corporation Limited (PCL)—which boasts interests in industries such as banking, food and beverages, telecommunications and the energy sector among others—saw its profit-after-tax for the half-year ended June 2016 slumping 17 percent compared to the same period last year.

In real terms—given that inflation hovers around 23 percent currently—these are serious cuts in earnings.

First Discount House Limited’s profit-after-tax during the half-year fell from roughly K532 million to around K441 million.

Its sister company, FDH Bank Limited—which during the year merged with hitherto State-owned bank Malawi Savings Bank after parent company FDH Group bought controlling stakes in the institution—had an even worse half-year, chalking just K116.9 million in consolidated profit-after-tax for the six months ended June 2016. That is a far cry from the K2.13 billion hauled over the same period last year.

CDH Investment Bank had to give up more than half of its profits, settling for consolidated profits before tax of just K192 million in  the January to June 2016 period from K493 million raked in the same period last year.

Leasing and Finance Company recorded K270 million as profit, lower than the K412 million achieved over the first half of 2015.

Other than reduced profits, some banks made outright losses during the half-year of 2016. Nedbank posted a loss of K603 million against a profit of K203 million realised during the same period last year.

Opportunity Bank—currently going through what it calls a business rationalization process—made an after-income tax loss of K1.1 billion compared to K1.9 billion over a similar period last year. The bubble, as I like to say, always bursts. And it has for the financial sector.

What does all this depressing news mean? Simple: the economy is reaching its breaking point because for a long time, even when every sector was depressed, the resilient Malawi financial services sector held the centre together, making super profits although critics contended it was at the expense of their ailing clients.

And when you read their reasons for the underperformance, the majority of them cite high interest rates as the major reason—firms and households just can’t borrow that much anymore; it is too expensive. The high inflation rate is not helping matters either.

A similar echo can be heard from FDH Bank: “The economic environment is expected to remain challenging in the foreseeable future mainly due to volatility in the local currency and high interest rates. Inflation is also likely to remain high for much of the year ahead.”

PCL’s outlook is that “prospects for 2016 point to a continued challenging operating environment with high inflation, a weakening local currency and low consumer spending.”

More depressing is that the financial industry—which for decades was the bubble that floated above turbulent waters—is finally bursting all over a collapsing economy.

And unless Lilongwe reviews its policy mix, the Malawi economy risks going the Harare way. Both the inflation obsessed Reserve Bank of Malawi (RBM) and borrowing addict Treasury are to blame for this mess.

The RBM has kept interest rates high to control the growth of money in the economy and—at least in its view—tame inflation.

Yet, anyone one who looks at the figures would clearly see that the major source of growth in money supply is excessive borrowing by government, which is a political problem that requires political stamina to say: enough is enough.

Instead, the central bank has gone out of its way to punish households and companies—critical players in the circular flow of income that powers the economy—with high interest rates, whose genesis is right there at the tax, borrow and spend Capital Hill.

And, as the results from the financial sector show, this misplaced policy mix is killing the economy. n