Mixed feelings for banks’ performance in 2017

Based on the current macroeconomic environment coupled with falling inflation rate, a resilient kwacha and relatively lower interest rates, expectations for the year ending 2017 are that commercial banks’ performance would be better.

But the Bankers Association of Malawi (BAM)—a grouping of the country’s commercial banks—is cautiously optimistic, saying the banking sector was in the year vulnerable to several shocks that affected the gains.

Over the past 11 months, the country’s economic environment has been fairly stable with inflation and interest rates on the downward spiral.

The kwacha also remained stable against major trading currencies due to what authorities attributed to fiscal discipline and efforts by the central bank to absorb excess liquidity from the banking system as well as maintenance of positive real interest rates.

In view of the recent inflation decline, the inflation rate outlook and the desire to consolidate the gains made in stabilising the economy, the central bank has also  been revising the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—to 16 percent as of last week from 25 percent at the start of the year.

Based on 2017 first half summary financial statements, most of the country’s commercial banks performed well, projecting that they would close the year on a good note, pinning their hopes on the improved macroeconomic environment.

Standard Bank, according to its published statement, registered strong performance in the first half due to a strong asset base and effective balance sheet management.

The bank’s total assets grew by 25 percent year-on-year largely driven by growth in loans and advances to customers and banks.

Deposits from customers also grew 18 percent year-on-year.

FMB Plc, in its financial statement for the same period noted that robust performance in Malawi, Zambia and Botswana underpinned growth in the group’s half-year profit after tax of K5.03 billion, representing a year-on-year growth of 79 percent from June 2016.

Similarly, National Bank of Malawi (NBM) Plc registered 22 percent growth in the group pre-tax profit to K14.4 billion from K11.8 billion recorded in the same period last year.

During the same period, FDH Bank showed the most outstanding performance compared to the same period last year as it posted a profit after tax of K1.64 billion.

In an interview, BAM president Paul Guta, who is also Nedbank Malawi managing director, said despite the macroeconomic environment has been fairly stable in 2017 and showed some signs of improvement, they may close the year on a bad note.

He said: “It has not been an easy road for banks this year. Default rates and cost of funding remained high in the year. Other than this, issues around power also had a direct impact on operating costs of banks.”

University of Malawi’s Chancellor College economics Professor Ben Kaluwa in an earlier interview said banks can do more than what is currently on paper, arguing that the spread between policy and interest rate is too wide.

He said: “The country’s banks have comfort zones. This is lending to government which is risk- free and returns are high. Similarly, in foreign exchange trading which banks engage in, the profit margins are also high. With this, banks are comfortable for them to compete in the core business which is the interest rates business,” he said.

But BAM urges otherwise. Guta said the spread between the interest and policy rate is more complicated than what people expect.

“What people tend to do is look at depositor’s rates and lending rates and conclude that the spread is too wide, but they do not look at the risk premium that comes on the market which translates in a cost for banks,” he said.

Commenting on the same, Misheck Esau, chief executive officer of CDH Investment Bank said while current economic underpinnings notably the dropping inflation should result in declining interest rates, the banking sector has some factors that could undermine the drive to reduce interest rates in a commensurate fashion.

He said: “High non-performing loans and a high cost of doing business coming from electricity black outs is an issue for most banks. To sustain banking systems most banks are using generators for their operations.”