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Liquidity remains biggest risk facing banking sector

Publishing Date : 10 July, 2017


Banks thrive when the market is liquid, Stanbic Bank Botswana romped to a profit after tax of P195 million representing a year-on-year growth of 48 percent, with an improved return on equity of 18 percent from 13 percent in 2015.

This is the second consecutive year of posting strong results. But the biggest risk remains the sustainability of the liquidity over the medium term, Leina Gabaraane, Stanbic Managing Director has observed in his comments in the latest Stanbic annual report.


He shares that liquidity was fairly adequate during the year (2016) and resulted in keeping cost of funding at acceptable levels. He says it is the single biggest contribution to the improvement in earnings across the banking industry and also resulted in return-on equity enhancements during the year. He further states that this somewhat mitigated the impact of the 50 basis point (bps) rate cut in August 2016. Notwithstanding, the sustainability of liquidity over the medium term is the biggest risk facing the banking sector.


With the Botswana operating environment remaining very tough, with credit extension being at its lowest in a decade, business confidence subdued with varying economic sector performance, Gabaraane clings to the hope that the bank’s refreshed strategy “Road to Excellence” was launched during the year. The core emphasis of this strategy centres on driving efficiencies on all client-impacting processes, building stronger teams with the singular aim of creating superior client experiences and structurally optimising the balance sheet.


Interest rates are at historically low levels, reflecting the efforts by the Central Bank to stimulate the weak economic environment. This culminated in four consecutive negative quarterly gross domestic product (GDP) readings up to June 2016. The slight recovery in September was a positive development. Gabaraane continues to observe that the challenge going forward is the generation of liquidity from real economic activity resulting from a diversified economy, stronger private enterprise and growth in employment levels. Without this, credit quality deterioration will be a resultant risk on the banking sector.


But he acknowledges that the economy looked promising at some end: “A recovery of diamond sales in 2016 by almost 40 percent translated into some improvement in quarter three 2016 GDP growth albeit marginally. The marginal recovery in the GDP contributed to improvements of other measures of the economy such as the marginal (1 percent) recovery of unemployment, the modest improvement of the business confidence index and the slight improvement in the World Economic Forum global competitive index. Improvements of any nature to the economy are always welcome, however the concern is always on their sustainability. For instance the 1 percent improvement in the formal employment levels is likely to be reversed by the recent closures in the mining sector.”


However, a landlocked Botswana, highly dependent on commodities should be wary of the unstable global economic performance and uncertainties remains the biggest risk to the mining-sector dependency in the country. Gabaraane argues that the sector was particularly impacted by low commodity prices during the year.


Economic blows that pained banks


In his remarks Gabaraane captures the sad moments when State-owned nickel / copper mines suffered a more severe impact on account of management efficiencies / low quality of ore and this resulted in the provisional liquidation of Bamangwato Concessions Limited (BCL) Mines with over 5,000 job losses. Some other private mines also shut down in the process.


While he opines that the recent firming-up of copper prices may provide new opportunities for some of these mines. “Global uncertainties also contributed to some of the domestic challenges. Brexit, changes in the American presidency / foreign policy, geopolitical risks and their impact on global trade is difficult to assess, but certainly  Botswana’s dependence on commodities make the country’s fiscals more vulnerable in the face of declining trade balance and reserves,” writes Gabaraane.


He observes that in a bid to maintain a level of stability and confidence, the Central Bank’s soft monetary policy stance may have bottomed-out with the bank rate maintained at 5.5 percent in December. The outlook is that of rate stability as inflation returns to the target 3-6 percent range with an up-side risk.



Do you think the closure of BCL will compel SPEDU to double their efforts in creating job opportunities in the Selibe Phikwe?