THE half-year results for the period to June 2024 for most banks were released over the past few weeks. Whether listed or not, banks are institutions of public interest and are obliged to release their financial numbers.
These results coincided with the mid-term monetary policy, and these put together give a feel of what is happening in the financial sector.
It is very unfortunate that although most indicators are pointing towards a dollarised economy, the financials were in local currency.
It is not like we have any special fixation towards the hard currency, but just for the purpose of deducing insights; we would prefer to know what is happening in the currency of trade.
Nevertheless, we will use the information available mostly using ratios.
It is also important to highlight that some of the banks are housed under holding companies that offer other financial services, and for simplicity will consider only the numbers at the holdings level.
The first metric we will look at is extracted from the balance sheet and it is the loans-to-deposits ratio (LTD).
LTD tells us how much banks are extending out to their clients as loans and advances versus what it is collecting as deposits.
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According to the Monetary Policy Statement (MPS), the average LTD was 52,51% by the end of June 2024. This number dropped by 3,47 percentage points from the March 2024 numbers right before the Zimbabwe Gold (ZWG) was introduced.
However, as per my calculations using the inflation-adjusted numbers for companies like First Capital Bank (FCB) and FBC Holdings had higher ratios at 97% and 78% respectively.
CBZ’s ratio was below the average at 41%.
Metric evaluates the appetite of banks to extend credit to clients per dollar of deposits collected and we can conclude that on average banks are not aggressive in their lending patterns at the moment.
We can also analyse which sectors these banks are extending credit to versus where they are picking these deposits.
The agriculture, manufacturing and distribution sectors have the lion’s share of loans and advances.
Given the effects of the El Niño-induced drought, only 14,53% of loans went towards agriculture compared to 17,48% in the corresponding period last year.
Banks like NMB, CBZ and FCB seem to have outweighted this sector at 35%, 21% and 18%, respectively.
However, the agricultural sector barely contributes to the agricultural sector with most deposits coming from the financial services and mining sector.
The mismatch between sectors that provide deposits and the ones that actually get deposits can pose a threat if it is significant, for example, if the agriculture sector performs poorly, it risks the mining depositors losing their money should the bank fail.
Given the uncertainty on the currency front, with talks of earlier dollarisation being thrown around, it will be interesting to have a look at the tenure of loans.
An analysis of NMB’s loan book will reveal that 44% of its loans will mature in the following 12 months, whilst the number is 51% for ZB Bank and 59% for FBC.
This demonstrates the bank’s attitude towards long-term lending but is also instructed by the nature of the deposits, which are also short-term in nature.
In terms of non-performing loans (NPL), the industry in general seems to be under shape.
The average NPL ratio according to the MPS was 2,02% as of June 2024, which is way below the 6% benchmark.
This number has generally been low since the end of the dollarisation era and the cleanup of NPLs through the Zimbabwe Asset Management Company (Zamco) and other companies like NMB was reported NPL ratios of as low as 1,2%.
Looking at the banks’ asset composition, we will notice that according to the MPS, most banks’ assets are concentrated in loans and advances, securities and investments and balances with the central bank.
It is interesting to note that the balances with foreign banks and foreign cash reduced significantly from 20,52% of total assets in 2023 to 8,71% in 2024.
It would be interesting to understand what necessitated such a drop is that banks have unwound their foreign currency holdings in favour of local currency?
To assess the financial health of the banking sector, we look at the capital adequacy ratio.
This ratio is a total weighted average of banks' assets using certain weights for different assets.
It basically assesses if a bank will be able to absorb shocks using its assets.
The monetary policy reported that on average banks in Zimbabwe are way above the minimum capital adequacy benchmark of 12% with the average at 46%.
There is also a core capital requirement set at US$30 million, the local currency equivalent for tire 1 banks and the MPS reported that 15 out of the 18 banks were compliant and the non-compliant banks are working to do so.
Moving to the income component of the financials, we will look at the net income margin.
This metric compares the profit of the bank by comparing the net interest income the bank gets minus interest expenses then dividing it by the earning assets.
In my calculations, I used the loans and advances as my earning assets and concluded that using the inflation-adjusted numbers most of the banks had a margin above 8% with other institutions like FCB having 13%.
If our earlier breakdown of LTD reviewed that banks are not as aggressive in their lending, so where else is their income coming from?
The MPS showed that only 10,44% of banks’ total income came from the funded income or the interest income.
Gains on revaluation of investment property contributed 25,19% towards banks profitability.
Given the hyperinflationary nature of our environment, banks tend to buy properties to hedge their capital and these revaluations on the properties are contributing to income.
It is, however, important to remember that this is not an actual cash movement, but for financial accounting purposes, they are classified as income.
Banks also made 17,74% of their money from fees and commissions up to June 2024 and 14,78% from the previous period. This has been the bone of contention as economic agents believe that banks are charging exorbitant fees in the form of monthly charges, transaction fees and balance enquiry fees amongst other charges.
This has also been blamed for peddling informalisation as other economic agents now prefer to deal with cash transactions.
There is also another trend that I have noticed that might not be explicitly captured in the numbers, where local banks are securing lines of credit from multilateral lenders but are particularly interested in extending them to exporters.
My suspicion is that exporters are favoured because this is foreign capital, which will have to be repaid at some point, and the uncertainty on the currency front disadvantages non-exporters, even those that generate foreign currency locally.
In conclusion, the picture that the numbers paint is that on average banks in Zimbabwe are playing it safe. If they are giving out loans, most of them are within a one-year maturity.
Their non-funded activities are supporting their profitability. The currency uncertainty is influencing the strategy and perhaps banks would alter their strategies if it were to be sorted.
- Hozheri is an investment analyst with an interest in sharing opinions on capital markets performance, the economy and international trade, among other areas. He holds a B. Com in Finance and is progressing well with the CFA programme. — 0784 707 653 and Rufaro Hozheri is his username for all social media platforms.
