THE easing of the impact of a brutal Covid-19 pandemic that claimed the lives of millions of people worldwide marked the end of one wave of volatilities, but the beginning of an elevated default risk era on the domestic banking landscape, a new report showed this week.
In an analysis titled ‘IH 2023 Banking Sector Report’, Inter Horizon Securities (IH), a leading advisory firm, gave Zimbabwe’s 19 member sector a clean bill of health, noting that a minority of lenders were non-compliant with regulator prescribed US$30 million minimum capital benchmarks, while capital adequacy ratios trended way above the required 12%.
The report covers banking sector dynamics from the end of 2021 to the first half of this year.
However, the advisory projected banks were moving into an era of potential defaults stemming out of pandemic time hard lockdowns, which ended with a sea of corporate graveyards worldwide.
Non-performing loans (NPLs) for Zimbabwe’s banking sector trended way below the globally prescribed 5% during the period.
But the report showed they were already taking an upward trajectory, spiralling to 1,54% during the year to December 31, 2022, from 0,94% at the end of 2021.
Underpinning the slight uptick was a high appetite for borrowing by Zimbabwean markets, as lenders swung to United States dollar indexed loans during the period, doing away with a battered domestic currency, which depreciated by shocking margins during the first half of this year alone.
The sector lifted loans and advances to ZW$1,29 trillion (about US$1,36 billion), as at December 31, 2022, rising from ZW$229,94 billion (about US$1,07 billion) during the year ended December 31, 2021, according to IH.
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This growth was in tandem with an aggressive expansion of combined deposits, which continued with its upward trajectory as markets warmed up to US dollar loans.
It showed that total deposits closed at ZW$$2,32 trillion (about US$2,44 billion) during the year ended December 31, 2022, compared to ZW$476,35 billion (about US$2,22 billion) during the same period in 2021.
“Non-performing loans in the Sub-Saharan Africa region are traditionally the most elevated and volatile in the world trending above the recommended benchmark of 5%,” IH said.
“The local banking sector has sustained NPLs below this benchmark despite expected defaults from the lingering negative effects of Covid-19.
“Sectors with the highest NPLs during the period under review were agriculture, mining and the household sector constituting 27,29%, 17,9% and 11,53%, respectively as at December 31 2022.
“However, with increased appetite for lending and the gradual impairment of loans from the unforeseen pandemic, NPLs have seen a gradual uptick moving from 0,94% as at December 31 2021 to 1,54% in December 2022.
“Intuitively the Zimbabwean market inherently carries high risk factors and this does not appear to be reflected in current NPL ratios possibly pointing to under declaration,” IH noted.
Lending related hurdles will not only be peculiar to Zimbabwe.
Some of the world’s biggest banks have reported steep rises in loan losses since the pandemic’s onset, as rising interest rates affect markets.
The US’s biggest banks — Morgan Stanley, Citigroup, JPMorgan, Bank of America, Wells Fargo and Goldman Sachs — were in July reported to have written off a combined US$5 billion as defaults mounted during the second quarter of this year.
In its report, IH said: “A total of three banking institutions were non-compliant with the new minimum capital requirements, and they are instituting various measures to bolster their capital position.
“All banking institutions were compliant with the minimum regulatory capital adequacy and tier 1 ratios.
“Aggregate core capital increased by 504,84% from ZW$101,04 billion as at 31 December 2021 to ZW$611,11 billion as at 31 December 2022.
“The growth was mainly attributed to retained earnings, constituting revaluation gains from investment properties and translation gains from foreign exchange-denominated assets”. It added.
IH pointed out that in US dollar terms and using an effective exchange rate, aggregate core capital increased by 37% from US$469,95 million to US$643,27 million.
“As at 31 December 2022, five banking institutions accounted for 65,40% (2021:66,03%) of total assets, 72,54% (2021:68,16%) of total deposits and 77,09% (2021:70,82%) of total loans and advances,” it said.
IH further stated that commercial banks continued to dominate the banking sector in terms of total assets, total deposits and total loans during the year ended December 31, 2022, accounting for 88,10% (2021:89,92%), 91,15% (2021:88,58%) and 87,66% (2021:83,50%), respectively.
“The banking sector recorded total liabilities of ZW$3,36 trillion (about US$3,53 billion) as at December 31 2022 from ZW$707,19 billion (about US$3,28bn) as at 31 December 2021,” IH noted.