The year 2019 was probably one of the most challenging years in recent years to be in the banking sector in Zambia. It would start with the abolishment of unwarranted charges by the Bank of Zambia and many Banks who did not see this coming were hit, especially those with a huge retail outlay. As at half-year results, the non-funded income segment had shed an average of 9.2% across the 18 member sector.
The year would end with tight liquidity as the BOZ reined in with a contractionary monetary policy to ease inflationary pressures. The Bank of Zambia would increase the Overnight Lending Facility rates by an incredible 1000 basis points (10 percentage points) from 18% to 28%. By this measure, the BOZ was simply telling the banking sector; “you are on your own baby”. This meant that banks had to undertake almost all the overnight interbank lending among themselves and recourse to the Bank of Zambia would really be an extreme measure.
The bank of Zambia would a few weeks later increase the policy rate by 125 basis points to 11.5%. Inflation had entered dangerous territory, double digits at 10.7% as of October 2019. However, the kwacha kept losing ground losing 4.7% in November alone and at one time trailing only behind Chile’s Peso in the World’s worst-performing currencies index according to Bloomberg currency index. The BOZ would then strike yet again, this time; they increased the statutory reserve ratios on kwacha and foreign currency deposits from 5% to 9%, further squeezing the lid on the liquidity throwing the 18 member industry into ‘panic’.
The Bank of Zambia would further reduce the reporting requirement of reserve ratios from weekly to daily basis with immediate effect, the plan here was to further squeeze the profits that some banks were making as a result of the lag of when they actually had the deposit and when they reported it to the BOZ. The BOZ claimed “smart” treasury guys were using the lag to trade and make profits, in the process creating money that was being added to the money supply; money supply the BOZ were desperately trying to control. The central bank was leaving no stone unturned in pursuit of market stability and reining in inflationary pressures, all this at the expense of Banks and financial industry whose cost of capital increased substantially. Ultimately, it would be the ordinary Zambian and industry that will pay for the prevailing tight liquidity and the consequent high cost of capital.
In light of the above, let’s dissect into the numbers and see who felt the rain and the others who just got wet.
STANBIC IN RECORD PROFITS
As if nothing was even happening in the macroeconomy, the biggest Bank in Zambia by asset size, Stanbic, showed some class and were in a league of their own. As at year-end, the bank reported an after-tax earnings of K449.3 million, an astronomical figure that has set a new record for profits in the Zambian banking sector toppling the K361 million set by Standard Chartered bank in 2016.
Despite the challenges presented above, income growth for Stanbic was bullish as it grew 28.1% year-on-year to K1.72 billion. The only notable concern was the 40% increase in funding costs during the year, an expected outcome given the Bank of Zambia contractionary monetary policy stance especially in the last quarter of the year.
All in all, Stanbic kept moving forward when other players in the industry were feeling the rains and the Financial Times in the UK took notice and named it the best Bank in Zambia 2019.
MIZINGA SETS THE STAGE FOR INCOMING ABSA
Barclays Zambia is set to start trading as ABSA Zambia on 10th February onwards and the second biggest bank by asset size in Zambia set the tone and momentum for ABSA Zambia to ride on as it starts an exciting after-divorce life of its own.
After-tax earnings grew 4% to K244.67 million and the bank was very aggressive in booking assets with the credit book growing 39.5% year-on-year. The Mizinga Melu team is sending one statement of intent to the market and that is, we believe in ABSA, we believe in Zambia and we will compete for market leadership. The only concern that could be giving Mizinga Melu a minor headache is the funding costs which grew 75% year on year due to tight liquidity in the marketplace.
BIG, STRONG, RELIABLE AND VERY PROFITABLE
ZANACO, the third-largest bank by asset size was ironically also in third place in after-tax earnings. The earnings grew a remarkable 58% to K231 million. It was second in the marketplace in terms of income growth which grew 18% to K1.58 billion; however, higher operational costs than Barclays meant it had to settle for third place on the profitability scale. Zanaco has been on an aggressive restructuring in recent years stepping into once unfamiliar territories like Private Banking and Bancassurance which have paid quick dividends.
The bank has also embarked on operational restructuring which has always weighed it down in recent years. It makes the money but its cost to income ratio which has averaged 65% in the past 4 years is not impressive and not comparable to its peers like Barclays and Standard Chartered. For this, it has adopted lean structuring which it hopes combined with its money-making prowess will take it to the top by 2022. All things equal, Zanaco has everything to succeed and many financial observers are confident that sooner rather than later, it will paint the sky red with those endearing three words; Big, Strong and Reliable.
HERE FOR GOOD IN THE TOP 5? LIKELY NOT ANYMORE
Standard Chartered Bank Zambia had a disappointing year going by its massive standards, but it still made the dough. After-tax earnings slid 56% to K117 million and came in fifth (pending CITI results) on the profitability scale. If CITI and Bank of China hit at least K118 million, Standard Chartered will have to settle for 7th place on the profitability scale, a first in over 10 years.
The high cost of funding attributed to tight liquidity conditions grew an astronomical 85% and non-interest income slid 13% due to the abolishment of unwarranted charges by the Bank of Zambia. These factors weighed heavily on the bank that made K1.08 billion in income. The Bank has also been in restructuring mode operationally and strategically going all out on the digitization concept by closing a number of branches. While some financial analysts have called the move “overkill”, Standard Chartered executives have simply laughed it off calling it the new name of the game, which they say will eventually pay off.
THE SIGNIFICANT OTHERS
Indo Zambia bank has been on a row in recent years bravely outpunching above its weight by challenging for the coveted top 5 spot. It came in fourth on the profitability scale (pending the release of CITI results) with after-tax earnings growing an impressive 62% to K188 million and it looks like they will most likely disturb the top 5 status quo. However, of notable concern was the growth in funding costs (interest expense) by an abnormal 121% year on year, suffering severely from the one disease that has plagued the market; tight liquidity. While many financial observers and analysts have tipped either FNB or Atlas Mara to make a dash for that top 5 spot, Indo is sending a serious message to the market that it’s a top contender too.
Overall, 2019 was a very challenging year to operate to be in the financial sector as there were major policy directives and macro-economic policies that had a huge bearing on the industry. However, it’s refreshing to note that a new profitability height was set. This goes to show that even in heavy rainfall, some banks will feel the rain, others, on the other hand, will simply just get wet and move forward!
Katandula Chitika is an Economist, Writer and Structured Finance Analyst. The views expressed in this article are solely mine and do not represent the views of my employer, church and any other organization I am affiliated to. Contact me on Katandula.chitika@gmail.com