Commercial banks’ mixed fortunes in 2019

While the country’s business environment demonstrated sluggish performance in 2019, commercial banks seemed to have performed well in terms of profitability.

In the just-ended year, the country continued to enjoy a stable macroeconomic environment characterised by falling inflation rate, a resilient kwacha and lower interest rates.

Published financial results showed that most banks performed relatively well compared to the year before.

For instance, Standard Bank plc, which reported a 13 percent drop in its after-tax profit for the year ended December 31 2018 due to a drop in net interest income, projects that its profit after-tax in the year ended December 31 2019 will be above the previous corresponding period by at least 45 percent.

Similarly, NBS Bank plc, which has been making losses until recently when it turned the corner, has announced that its profit will be 100 percent higher than the previous year’s.

In the first-half of last year, National Bank of Malawi (NBM) plc registered a seven percent increase in after-tax profit to K9.1 billion from K8.5 bilion during the same period the previous year.

FDH Bank, a subsidiary of FDH Holdings Limited, also posted an after-tax-profit of K3.35 billion in the first-half of this year from K1.34 billion during the corresponding period the year before and is also anticipating profits for 2019 to be higher.

But in what analysts described as sign of capital and liquidity squeeze, 2019 also saw both big and small banks undergoing rationalisation processes while others exited the market.

In March last year, NBM, which is one of  the country’s biggest commercial bank by assets and profitability, laid off an undisclosed number of employees in what it called voluntary retirement to reduce its operational expenses.

Barely a week later, NBS Bank plc also opened a voluntary exit window for its staff in line with closure of the bank’s five service centres as part of the bank’s rationalisation of its business operations. 

In November,  Frankfurt-listed Fintech, MyBucks S.A., which earlier in the year acquired 50 percent stake in New Finance Bank Malawi Limited, acquired a 100 percent stake in Nedbank Malawi, which was facing liquidity challenges. 

Alliance Capital Limited research manager Bond Mtembekeza in an interview said banks thrive in an environment of high interest rates as asset prices are higher and the margins are better.

He said as interest rates go down, the reduction in profits for the banks is also affected.

 “In an environment like this, the only way to remain profitable is either to reduce operational costs or push transactional volume and substantially increase the loan book or do all that simultaneously.

“One can argue that in the wake of these developments, banks are trying to react to the prevalent operating environment by restructuring for them to remain profitable,” he said.

Cedar Capital Limited chief executive officer Armstrong Kamphoni observed that the banking industry has had an easy ride, enjoying cheap deposits and investing them in either high-yielding Treasury bills or lending to a few borrowers at premium rates.

He said the interest rate spread has, for a long time, bordered on profiteering and it reached over 40 percent in their good times, a development which was bound to come to a stop.

“In a situation like this, businesses should adapt and we expect that some resilient banks will adapt, survive and resume growth.

“We think currently, the banking industry is undergoing that period where boards and executives should look to grow their customer base, innovate and come up with suitable products and services to generate revenue and spur growth,” he said.

Bankers Association of Malawi (BAM) president Kwanele Ngwenya said in context of the stable macroeconomic environment, commercial banks have showed some signs of improvement.

“This far, things are looking good for the banking sector. With the stable economy, banks’ performance and operations have improved for the better.

“We have seen a number of positives key of which is the decline in non-performing loans despite a few bottlenecks that the sector faced in 2019,” he said.

Reserve Bank of Malawi (RBM) Governor Dalitso Kabambe said the central bank will continue to work with banks to create a mutual understanding and manage expectations of the financial sector.

 He said the central bank is committed to strengthening the country’s financial system and anchor stability of the country’s macroeconomic environment.

Kabambe said the central bank will continue to monitor the performance of commercial banks to ensure that banks are healthy.

With a view to improve financial intermediation and ultimately access to finance, RBM in May last year unveiled the new calculation formula for determining reference rate or base lending rate for commercial banks.

Previously, commercial banks base lending rates were unified and were set at Lombard rate— an automatic window to assist the then liquidity-stressed banks to access money while containing risks to inflation—which was 0.4 percentage points above the policy rate or bank rate.