The banking sector remains vulnerable despite favourable profit levels recorded last year as indicated by the high percentage of demand deposits, the African Development Bank (AfDB) has said.
According to the Zimbabwe Monthly Economic Review of April as at February 29 2012, banking sector deposits were made up of 59,6% in demand deposits (saving and short-term deposits (31,6%) and long-term deposits (8,8%).
Despite the liquidity constraints and other financial sector challenges, several banks made profits for the financial year ended December 31 2011.
TN Holdings posted a profit before tax of $5,89 million after making some cash discounting amounting to $6,5 million. Kingdom Bank posted a profit before tax of $782 031.
CBZ posted a profit of $24,7 million and its loan book was valued at $800 million and its loan-to-deposit ratio was 96%.
Stanbic and BancABC posted profits after tax of $11 million and 87,7 million Botswana pula respectively.
In 2011, Barclays Bank returned to profit posting a $1,4 million after-tax profit from a loss of $1,3 million the previous year.
However, Trust bank incurred a $3,6 million loss before tax attributed to a branch roll-out programme.
“Despite the favourable profitability levels, the banking sector still faces some challenges,” reads part of the AfDB report.
“These include liquidity shortages, limited inter-bank lending between strong and weak banks, small amount of the lender-of-the-last-resort facility at the central bank, short-term nature of the bulk of the banking sector deposits, high bank operating costs and limited bank sources of income.”
Other challenges included a limited range of domestic money market instruments, high bank credit demand against limited supply, weak depositor confidence, limited external lines of credit, money circulating outside the formal banking sector and non-performing loans. An estimated $3 billion was believed to be circulating outside the banking system.
In February the loan-to-deposit ratio declined from 87,4% in January to 82,2%.
“This stance is in view of the prevailing non-performing loans, over-lending, over-borrowing and high anticipated default risk,” read part of the report.
“Despite the increase in banking sector deposits, their composition remains unfavourable for long-term lending and investment.
“The composition of deposits suggests weak depositor confidence, hence the concentration in short-term deposits.”
AfDB said the prevailing conditions pointed to a need for cautiousness on the part of both borrowers and lenders adding that in an environment with high lending rates, over borrowing is risky as it easily results in high loan default rates.