Banks brave tight monetary policy

Based on 2013 first half summary financial statements, most commercial banks have performed better than last year same period regardless of the prevailing liquidity problems and tight monetary policy.

The financial statements for the period ending June 2013 show overwhelming evidence that commercial banks have apparently been prudent and have perhaps built on lessons drawn from last year’s operating environment.

Around this time last year, the Malawi Government launched the Economic Recovery Plan (ERP) which argued that the success of the proposed macroeconomic reforms hinged on the implementation of monetary policy that is less expansionary and accommodating.

The ERP argued that it was imperative to tighten monetary policy by increasing the cost of credit and mopping up excess liquidity through periodic use of interest rates, as and when market conditions dictate.

Implementing the policy, the Reserve Bank of Malawi (RBM) tightened the monetary screws including increasing and upholding the base lending rate at 25 percent since December 2012. RBM also increased the Liquidity Reserve Requirement (LRR) to 15.5 percent.

However, with the prevailing tight monetary policy, during 2013 first half the operating environment was not conducive with inflation, liquidity, interbank lending rates, and treasury bills rates worsening.

Responding to liquidity challenges around end-March this year commercial banks raised their base lending rates to over 40 percent, which have recently started to decline.

However, based on the recent financial statements for the year ending June 2013, all commercial banks except Nedbank among others have braved the liquidity challenge and posted higher profits than last year same period.

Nedbank according to its published statements, its profit-after-tax stood at a loss of K200 million down from a profit of K51 million realised in the same period last year. The bank blames the poor performance on slow growth in loans.

Nedbank notes that the economy continues to show positive signs of recovery and increased business activity. Nedbank cautions that pressure on foreign currency is likely to mount following the closure of this year’s tobacco marketing season.

It further notes that impairment charges have been booked for prudential reason and increases in costs which are outstripping increases in revenue. However, the bank was able to grow non-interest revenue.

Standard Bank, in its summary financial statements, notes that the economy continued to feel the effects of major economic reforms.

However, regardless of the effects of the economic reforms, Standard Bank’s profit-after-tax for the first half of the year was at K5.7 billion up from K4.3 billion while its income grew by 37 percent, balance sheet grew by 33 percent. This, the bank has said, was achieved regardless of a 33 percent increase in operating costs.

National Bank group profits went up 89 percent to K9.2 billion. The bank notes that the operating environment was fairly positive signalling some modest economic recovery. This is in spite of liquidity challenges expressed in the banking sector.

To cap it all, NBS Bank has shown the most outstanding performance compared to its previous reporting period. According to its summary financial statements, the bank’s profits jumped by 703 percent to K514 million for the year ended June 30 2013, from K64 million in the corresponding period. The statement also indicates that the group’s profit-before-tax jumped 161 percent to K851 million above the prior year same period of K326 million.

Apparently, the commercial banks’ profits hinge on interest rates and revenue which experts have noted are prohibitive.

But Chancellor College economics professor Ben Kaluwa, commenting on bank deposits in an interview last week, noted that Malawi has the highest spreads between lending and saving rates.

However, the Bankers Association of Malawi (BAM) argues otherwise.

BAM executive director, Lyness Nkungula commenting on interest rates earlier argued that the determination of interest rates is more complicated than simple manipulation of RBM’s base lending rate.

She noted that commercial banks adjust interest rates based on tangible economic trends after a thorough decision-making process. It is also important to note that interest rate is a demand-supply issue—the willingness of depositors to save versus investors to borrow. However there is high expectation that interest rates will come down if the economic fundamentals continue to show improved trends.

She added that where the policy tightens, the money supply, availability of money at commercial banks’ disposal to lend out among others, is affected.

Nkungula further argued that a critical function of a commercial bank is to attract deposits and lend out to borrowers noting that the current scenario where we have observed treasury bills being oversubscribed means that borrowers at the existing high interest rates are few.