- Low interest rates hit banks hard
- Market value also tumbles
- Botswana banks 3rd less profitable regionally
- FNBB loses almost P4bn in value since 2013
- StanChart loses P2.4bn in value since 2013
Due to the continued interest rates decline in Botswana, commercial banks profitability continue to decline, scarring off capital markets investors in the process. Consequently, the market capitalisation also takes a knock.
Independent economic think tank, Econsult Botswana, headed by former Deputy Governor of Bank of Botswana Dr Keith Jefferies compiled a research paper that revealed that since 2014 the profitability of commercial banks in Botswana – as measured by the return on assets (RoA) – is low compared to other countries in the Southern African Development Community (SADC) and the East African Community (EAC).
The academic document focuses on bank deposit lending spreads in Botswana as well as a comparison with selected Southern African Development Community (SADC) and East African Community (EAC) countries. Deposit lending spread is the lending rate minus the deposit rate.
The Botswana banking sector is historically characterised by high rates of profitability, which were often thought to be due to high bank lending interest rates and high spreads between deposit and lending rates. However, profitability has declined substantially, and in 2016-17 was amongst the lowest in the ten countries reviewed. Average bank lending rates have also dropped significantly and are similarly now around the lowest in the country group at 5 percent. The deposit-lending spread has declined from its peak in 2009 and is now below the average (although not the lowest) for the countries reviewed. The Econsult report also reveals that these changes have been associated with a dramatic improvement in the efficiency of financial intermediation, with banks now holding far fewer Bank of Botswana Certificates (BoBCs) and lending out a much greater proportion of deposits.
Dr Jefferies reveals in the report that amongst the drivers of these changes are increased competition in the banking sector and lower policy interest rates. But despite increased competition, he said larger banks can still charge higher spreads than smaller banks. “The bulk of the deposit-lending spread is now accounted for by operational costs and nonperforming loans, rather than profit. Further reductions in spreads would therefore require more efficient banking operations (lower costs) and reduced loan losses,” he said.
As Econsult observed, profitability declined in recent years, down from 45.7 percent in 2007 to 13.3 percent in 2017 and is now the third lowest after Mauritius and South Africa. “The trend in profitability shows that commercial banks in Botswana are not nearly as profitable as they were in the past. Not only are profits as measured by return on assets declining, but these profits are spread over a rising capital base, as indicated by the increase in the capital as a percentage of liabilities.”
Bank lending interest rates in Botswana are now among the lowest in SADC/EAC countries. Bank lending rates also reflect the monetary policy environment, which has entailed a substantial reduction in policy and related rates since 2008.
The banking sector has been a stomach-churning ride for fund managers, investors as well as shareholders. Its days of glory have now turned to an anticlimax. Soon after the golden ages, came tight liquidity, unfavorable interest rates and flooding impairments which market pundits argue will dig dipper into banks’ pockets, subjecting equities to pressure, evident at First National Bank of Botswana (FNBB) and Standard Chartered Bank of Botswana (Stanchart), two of the four listed banks on Botswana Stock Exchange Limited (BSEL). They are also amongst the biggest banks in Botswana.