The banking sector will continue to experience a downturn due to declining interest rates but potential for growth exists in the area of non-interest-income, according to a quarterly report by Motswedi Securities.
The report, which tracked the performance of the economy between July and September 2015, paints a gloomy picture about growth prospects in the sector, saying a decline in interest rates hampared growth. The report noted further that liquidity remained a challenge and return on equity continued to slide. Furthermore, due to the low interest rates, net interest margins came under pressure, declining from an average of over 10 percent in 2013 to less than 9 percent in 2014. Motswedi Securities market watchers expect the trend to continue until 2017 until policy makers intervene by increasing interest rates.
However there is light at the end of the tunnel. The central bank announced recently that liquidity spiked three fold to P14.2 billion between February and September this year.
Motswedi Securities Research Analyst and report co-author Tlotlo Ramalepa told this publication that while the rise in liquidity is positive for banks it is unlikely to have an impact on the dim trend in the fortunes of the industry going forward. He explained that the impact of the declining interest rate environment will continue to hit consumers in the long run as the likelihood of an upward adjustment in the interest rate is low.
In April this year, the Bank of Botswana (BoB) revised its primary reserve requirements, thereby injecting P2.3 billion into the banking sector. Analysts admit that the BoB decision provided stimulus into the financial services sector.
“Given the relatively low incentive for savers, we believe banks could struggle to accumulate more deposits which could pose upside pressure on interest expense and ultimately weighing down on profitability. Therefore considering the pressure on NIMs and liquidity constraints we take a cautious stance to the banking industry,” reads the report.
The Motswedi Securities report concludes by strumming an optimistic chord when it notes that there is room for growth on the non-interest avenue which could be driven by new products, innovation and corporate deals, in order to hedge the risk from the low interest rate environment. Motswedi highlights First National Bank as the only listed bank to cover its non-interest expenses with non-interest income.