No Watungwa, banks are making money

Contrary to claims by Bankers Association of Zimbabwe president, Ralph Watungwa, that local banks are not making money, the sector is indeed making more than it did at the peak of the economy in 2014 and making returns higher than their regional counterparts, an analysis by this publication reveals.

According to the 2021 Monetary Policy Statement (MPS), banks made $34,2 billion (US$414 million at the 2020 year-end official exchange rate of 82) in profits for the full year to December 2020.

An average parallel market exchange rate for the year would be lower than the 82, making the profits even higher depending with the level of performance throughout the year.

This comes at a time banks have been accused of overcharging by both local and international customers.

With the sector’s loan to deposit ratio at just 39,5 percent or $82,4 billion of the total deposits of $208,9 billion, banks are making the bulk of profits from non-interest income.

According to central bank statistics, 79,5 percent of the $34,2 billion profits came from non-interest income, which comes from, among other sources, fees and commissions.

However, speaking at an MPS post-mortem held early this week, BAZ president Watungwa tried to dismiss the notion that banks are making money saying the sector was not that profitable despite the “very high charges”.

“Bank charges and interest rates are perceived to be very high, while this is so, banks are not making money and not building capital as quickly as they should,” he said.

Watungwa said despite “feeling bad” about the high charges, the sector can’t see the profitability that comes with the bank charges that have been of major concern to stakeholders both local and foreign.

However, Business Weekly can reveal that the $34 billion (US$414,6 million) that the banks made is much more than what they were making in 2014 when net profit was US$52,8 million or the year before when profit for the period was US$3,4 million.

Other metrics show a highly profitable banking sector with return on assets for 2020 at 13,55 percent and return on equity at 45,54 percent.

In Kenya the banking sector’s return on assets decreased to 1,64 percent in December 2020.

In Nigeria banks were enjoying return on equity of an average 19,5 percent in 2020 and return on assets of approximately 3 percent.

Back in 2019, Zimbabwe banks performed exceptionally well with return on equity at 33,02 percent.

This was in line with Africa’s top performers. The African banking industry produced some of the highest returns on equity anywhere in the world in 2019, in some cases vastly outperforming their counterparts in more developed economies.

Among the more dramatic examples are three of Global Finance’s 2020 Best Bank award winners: BNI Madagascar, with an ROE of 43,6 percent; Fidelity Bank Ghana, at 32,0 percent; and Zenith Bank in Nigeria, at 23,8 percent.

For comparison, US banks’ average ROE has hovered in the range of 3 percent to 12 percent for the past decade, according to the Federal Reserve Bank of St Louis.

However, as highlighted in the MPS, non-interest income mainly comprised other non-interest income (translation gains on foreign currency denominated assets, revaluation gains from investment properties) as well as fees and commissions.

Of the $34 billion profit, 43,61 percent came from other non-interest income, which is mostly revaluation gains, 26,87 percent from fees and commission, 18,01 percent from interest income from loans and advances, 9,01 percent from foreign exchange and the balance of 2,5 percent from other interest earnings.

While banks and other market watchers argue that profits under revaluations (43,6 percent) and probably under fees and commission (26,87 percent) is not real cash, the 18,01 percent from interest income alone, is enough for banks to make more than the US$52 million made in 2014.

Using a 2020 parallel market exchange rate average of 77 or the year-end official rate of 82, the $34 billion profits translates to US$441 million or US$414 million.

If we take out 69 percent of the earnings that might be argued as not real cash as they fall under translation gains on foreign currency denominated assets and revaluation gains from investment properties, it will still leave banks with an estimated profit of US$136,7 million or US$128 million again more than what they were making in 2014.

Even after taking out some earnings, that might still be cash if the central bank had given us
the split between cash earnings and revaluation earnings, banks’ earnings have been growing at an average 17 percent in real earnings

Such profit levels are also at a time the loan to deposit ratio (LDR) is below 40 percent which means banks are making money from high interest rates or exorbitant transaction fees.

Banks need to ‘sweat their assets’ for better returns.

Speaking at the same event, Permanent secretary in the Ministry of Finance and Economic Development George Guvamatanga, said despite the prevailing tough economic environment, local banks should intensively sweat their assets rather than just sit back and collect fees and commissions from transactions.

He said banks are sitting on more than US$1 billion and yet they have only lent a very small portion of that.

“If you are not utilising 50 percent of your balance sheet certainly your profitability will be much much lower.”

He said banks cannot then compensate that by overcharging consumers because of their inefficiencies.

“There is inefficiencies that we are seeing that the balance sheets are not fully utilised and that inefficiency is now being translated into higher banking costs, so that you actually make up for the 50 percent of the balance sheet that you are not utilising,” he said.



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