Banks ripping off customers

AS the corporate reporting season for the financial year ended December 31 2012 draws to an end, the spotlight has been firmly focused on Zimbabwe's banks, with analysts saying the recently-published results by this key sector indicate it is largely on solid ground despite the country's economic challenges.

With almost all the banks having published their trading results for the past year, most have reported profits. However, alarm bells are being raised by analysts, with some concerns on the sustainability of banks' profitability given recent and pending developments in the sector.

The concern stems from the fact that while banks generally grew their net interest income (NII), the bulk of their profits in 2012 came from non-funded sources, indicating they were still driving their business models on the basis of account maintenance fees.

Transaction commissions, commissions and arrangement fees on loans and advances, as well as trading margins on foreign exchange, have remained largely subdued, with cash withdrawal fees dominating banks' income lines.

For instance, according to Barclays Bank's results for 2012, non- funded income(NFI) totalled US$30 million, with account ledger fees amounting to US$8,9 million, while US$8,3 million was earned from cash withdrawal fees. Income earned from other fees and commissions was a further US$7,8 million.

A similar pattern emerges across most of the large banks, where NFI outstripped income from lending activities. MBCA Bank raked in US$11,1 million in NFI, versus US$10,5 million in NII.

Stanbic Bank had NFI of US$40 million compared to US$32 million in net interest earnings. Standard Chartered Bank made US$48,3 million from non-funded activities, with the bank earning net interest income of US$18 million for the year under review.

Whilst throughout the world banks are expected to earn their lion's share of income from lending and other forms of financial intermediation, banks in Zimbabwe have adopted business models where non-funded income should at least cover a bank's overhead operating costs on a sustainable basis.

The view is lending is inherently risky and involves the deployment of capital.

Interest rates are also variable over time, so that interest income is also subject to high variability from factors beyond a bank's control. In order to minimise risk of loss and to increase predictability of income, banks rely on non- funded income streams which come predominantly from sources within their own control.

Last week, Bankers Association of Zimbabwe president,George Guvamatanga (pictured) pointed out that banks would lose about US$40 million owing to the Memorandum of Understanding (MoU) signed by industry players early this year.

However, financial analysts think Guvamatanga may have downplayed the potential impact of the measures on banks' overall income going forward.

Analysts named the upward review of the minimum regulatory capital thresholds for all banks announced by the RBZ late last year, the MoU concluded by the banks aimed at their self-regulation on bank charges on certain classes of accounts, the capping of lending rates, as well as the directive by the Reserve Bank for banks to target at least 30% of their lending at SMEs, as areas of concern.

Virtually all the reporting institutions acknowledged that the macro trading environment has been stable since the advent of dollarisation in 2009. However , they have all lamented the country's declining economic growth rate as well as the deepening liquidity crisis, fuelled mainly by the country's failure to rein in imports.

Ritesh Anand, chief executive of Invictus Capital Securities Zimbabwe, a securities dealing and research firm, said the banking sector remained attractive despite the identified setbacks.

"We think that banks overall are very attractive. We particularly like FBC, CBZ and NMB, but there are others which are also attractive.

Our first impression of the banks' results for 2012, without a deeper analysis, is that performance was generally good. However, we are also aware of key adverse developments whose impact we are still assessing, that is, the reduction in the level of bank charges on accounts below US$800 as well as the cap on lending interest rates," Anand said.

In addition to these concerns, analysts have also said the recent directive by the central bank for banks to target a minimum 30% of their loan portfolios for SMEs will have consequences for credit quality and impact overall credit availability as this was a form of directed lending.

However, although Guvamatanga last week said these directives would not have a big impact on bank profitability, Anand believed the long-term effects of these measures might be more profound.

"We look at the example of Royal Bank, which had over 2000 accounts below US$500 dollars. If this is the trend amongst the banks, then one stands to worry," Anand added.

In a statement attached to its results, NMBZ, the holding company for NMB Bank, said the announced measures would have a pronounced effect on banks' profitability.

NMBZ made a net profit after tax of US$7 million during the year under review but anticipates that US$26 million in new lines of credit secured towards the end of last year will have a positive impact on earnings, given the bank is now able to underwrite more lending business.

Managing Director of MMC Capital, a Research and Investment firm, Edward Mapokotera, said his company's preliminary view of the banking sector results was that while they were positive, they outlined emerging risks.

He said MMC's concern was with emerging technologies potentially having a negative impact on bank earnings if they do not adapt, adopt and respond to competitive challenges coming on the back of emerging technologies.