Banking sector to shrink in 2024

Zimbabwe’s banking sector has registered quite a recovery in 2023 due to the increased use of US dollars in the economy, but in 2024 the sector might suffer from El Niño effects and the reduction in lending according to a research by Morgan & Co, a leading broking company.

The research said; “2023 was one of the best years for global banking since 2007 as interest rates buoyed the industry’s profits to record highs.

“However, this also resulted in risk mismatches between assets and liabilities in some banks which, in turn, led to bank runs and bankruptcies.”

The local banking sector also benefited from the higher interest rates as it banked on the increasing USD denominated loans.

However, the researchers believe the rebound could be short-lived as 2024 promises to push back on the sector’s positive trend with El Niño, depressed metals prices and tight monetary policies.

Morgan & Co Research, lending identified four themes that they believe will define Zimbabwe’s banking sector in 2024 that are slowing down, lending margin softening, non-performing loans (NPLs) and decline in non-interest income.

NPLs ratio has reversed its trend since the beginning of 2021 in response to a rise in USD loans in issue by banks.

Although the ratio is currently below the benchmark of 5 percent, Morgan & Co. anticipates that current tight monetary policies and EL Niño effects on the largest recipient of loans that is agriculture will push the ratio closer to benchmark in 2024, if not higher.

“In terms of sectoral distribution of non-performing loans, as at March 31, 2023, the agricultural sector (67,68 percent) had the largest value of non-performing loans followed by individuals (9,32 percent),” Zimnat Asset Management said in a report.

Reporting banks have issued that they have seen a rise in USD denominated loans and with the agriculture sector borrowing foreign currency and suffering exchange losses when selling their produce, it is not a surprise to see them leading in this category.

Economist, Dr Evelyn Chifamba, said high NPLs might instigate banking industry instability and episodes of bank failures.

“NPLs deter economic performance in several ways. To begin with, banks might strategically reduce lending to avoid further losses, which reduces the supply of loans to economic agents.

“A reduction in loans issued in the market slows economic activities, further negatively impacting the economic growth of a nation,” Chifamba said.

She added that the complexity and connectivity of financial markets to the rest of the economy make them vital to understand the consequences of NPLs accumulation, especially in developing countries.

“The quantum of loans issued rose significantly across all sectors between 2020 and 2021 before plateauing in 2022. The rise was driven by a recovery in USD bank balances and the loans-to-deposits ratio since 2020, but upward revisions in Zimbabwe dollar interest rates in 2022 slowed down new loan issues since the second quarter of 2022,” the research reads.

With the Reserve Bank of Zimbabwe (RBZ) continuing with its tight monetary policies to USD lending it resulted in USD lending slowing down since the third quarter ending September 30, 2023.

It was noted that the sector is seeing a softening of lending margins although Zimbabwe’s banking sector’s lending margin has averaged 69 percent in the last decade.

“The lending margins have also been consistently higher than in developed markets whose lending margins range between 1 percent and 5 percent. The margin hit a 10-year high of 86 percent in 2021 but has been softening ever since given the USD lending operations which have been increasingly influencing the overall lending margin,” Morgan & Co. noted.

Expectation is that there will be marginal changes to the overall lending margin in 2024 given the largely static USD lending and deposit rates of around 12 percent and 4 percent, respectively, in 2023.

Non-interest income declines have been seen in the banking sector during the course of the year due to the preference of holding cash by citizens and businesses alike.

“While the economy’s turn to the US Dollar underpinned a rebound in lending activity since 2020, the strong preference for hard cash in daily transactions has seen recent activity in the country’s payments ecosystem slowing down,” the research added.

This, in turn, has resulted in less transactions and less amounts being recorded in recent months and to this effect, Morgan & Co. anticipates the value of transactions to decline by 4 percent in 2023.-ebusinessweekly