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Bank sector profitability improved in 2016

Publishing Date : 25 September, 2017


The Bank of Botswana has said banking sector’s profitability improved in 2016, with income after-tax increasing by 29.3 percent from P1.1 billion in 2015 to P1.4 billion in December 2016.

As a result, Return on Average Total Assets (ROAA) and Return on Equity (ROE) also increased from 1.5 percent and 13.3 percent to 1.8 percent and 14.4 percent, respectively. Overall, the banking sector complied with the minimum prudential and statutory thresholds as expected. According to the Banking Supervision Annual Report 2016 released this week, the banking sector’s total assets increased by 5.3 percent from P76.6 billion in December 2015 to P80.6 billion. Loans and advances grew by 6.2 percent to P51.3 billion in December 2016, compared to growth of 7.1 percent in 2015.

“The Liquid Assets to Total Assets Ratio rose from 15.4 percent (2015) to 16.7 percent (2016), following an increase in liquid assets. Similarly, the ratio of NPLs to Total Loans and Advances increased from 3.9 percent in December 2015 to 4.9 percent in December 2016. The household sector accounted for 59 percent of total NPLs. The ratio of aggregate Large Exposures to Unimpaired Capital was much lower than the 800 percent maximum prudential limit set for banks in Botswana, implying satisfactory management of credit concentration risk,” reads the report.

In 2016, total customer deposits grew by 4.2 percent to P62.4 billion, the report further states. It recognizes that customer deposits constituted the largest proportion of liabilities at 77.4 percent and, as expected, the primary source of funding for the banking assets. “Interbank balances and credit from institutions increased by 20.4 percent from P3.3 billion in 2015 to P4 billion in 2016, as banks accessed alternative sources of funding for asset growth. As a result, the Financial Intermediation Ratio (the ratio of Loans and Advances to Deposits) increased from 80.6 percent to 82.2 percent.”

The Banking Supervision report notes that the banking sector was adequately capitalised and met the new regulatory capital requirements, with all banks reporting Capital Adequacy and Common Equity Tier 1 Capital Ratios in excess of the minimum prudential requirements of 15 percent and 4.5 percent, respectively. The banking industry’s capital adequacy ratio was 19.6 percent in December 2016 (December 2015: 20.1 percent).

Access to banking services, as measured by the ratio of Bank Accounts to Adult1 Population, improved from 75.9 percent in 2015 to 76.5 percent in 2016. Notwithstanding the fact that an individual can have multiple accounts, the ratio of Bank Accounts to Adult Population provides a rough indicator of access to banking services. The aggregate number of bank accounts grew by 3 percent from 1.13 million in 2015 to 1.17 million in 2016, while the number of accounts held by the adult population grew by 2.7 percent from 1.49 million to 1.53 million.

The Banking Supervision Annual report states that the employment levels in the banking sector for 2015 and 2016 increased by 0.5 percent from 5 030 in 2015 to 5 055 in 2016. The increase in employment levels was due to branch expansion. However, it further records that five banks recorded declines in their employment levels during the year under review due to branch rationalisation and automation.

The report indicates that Banks continued to innovate and introduce new products and services, including Credit Default Swaps (CDS)2 for institutional investors. CDS is an agreement where the buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults. Various savings accounts, such as target savings and offshore accounts, were also introduced.

To further enhance the existing service delivery channels, some banks upgraded the intelligent ATMs, among others, improving functionality with respect to cash and cheque deposits, withdrawal of foreign currency (e.g., South African rand (ZAR)), bill payments, and cardless services. Point of Sale (PoS) functionalities were also upgraded to permit acceptance of Union Pay International cards3, as well as allowing local merchants and customers to pay in any currency of their choice, where feasible.

Furthermore, PoS machines were enhanced to allow payment using earned cash-back points. In addition, the online banking platforms for small and medium enterprises were extended to include services such as payments to other bank accounts held in Botswana, bulk file payments for multiple beneficiaries and segregation of duties in the platform, according to an individual client’s needs.


According to the Banking Supervision Annual report, the banking sector’s total assets increased by 5.3 percent in 2016 (December 2015: 12.7 percent) from P76.6 billion in December 2015 to P80.6 billion; mainly reflecting a 6.2 percent increase in gross loans and advances to P51.3 billion in December 2016. Net loans and advances constituted a larger proportion of total banking sector assets (62 percent), followed by investment and trading securities (14 percent).

It states that the proportions of both assets and liabilities for 2015 and 2016 have largely remained unchanged, with minimal variations between the two periods. The report further buttresses that it is evident that the major source of funding for commercial bank assets continues to be customer deposits. In an effort to enhance and strengthen the resilience of the banking sector to economic and financial shocks, the Bank of Botswana says it implemented the Basel II Capital framework which came into effect on January 1, 2016.

“In order to facilitate an orderly transition to the new capital regime, the Bank adopted a gradual approach to Basel II implementation, commencing with Pillar 1 (Simple Approaches) and Pillar 3 disclosure requirements. The implementation of Pillar 2 and the Advanced Approaches has been deferred to a later stage.” According to the report, the commercial banks’ Large Exposures to Unimpaired Capital Ratio increased to 195 percent (2015: 194 percent). This ratio differed considerably among individual banks, ranging from 65.5 percent to 484.1 percent.

“The large exposures increased from P18.2 billion in 2015 to P20 billion in 2016, while unimpaired capital increased to P10.2 billion in 2016 (2015: P9.4 billion). The Large Exposures to Total Loans and Advances Ratio was 38.9 percent (2015: 37.7 percent). All banks maintained Large Exposures to Unimpaired Capital Ratios within the recommended 800 percent prudential limit.” The Banking Supervision Annual report states that the banking sector’s Liquid Assets to Total Deposit Ratio increased from 19.7 percent in 2015 to 21.6 percent in 2016, which was significantly above the 10 percent minimum prudential requirement.

“Similarly, the Liquid Assets to Total Assets Ratio increased from 15.4 percent in 2015, to 16.7 percent in 2016, following an increase in liquid assets. Overall, the total liquid assets held in the banking sector increased to P13.5 billion as at December 31, 2016 (December 2015: P11.8 billion),” it states. The banks’ aggregate cash and balances with the Bank increased by 38.2 percent from P4.6 billion in 2015 to P6.3 billion in 2016. Commercial banks’ placements with other banks and credit institutions increased by 3.9 percent from P10.5 billion in 2015 to P11 billion in 2016.

Chart 2.14 shows Bank of Botswana Certificates (BoBCs) holdings by banks for the period 2012 - 2016. There was a slight decrease in BoBCs holdings to P7.9 billion during 2016 (December 2015: P8.2 billion).  The Report says overall, the liquidity indicators show an improved liquidity condition in 2016.

“The banking industry’s unimpaired capital increased by 9.2 percent from P9.4 billion in 2015 to P10.2 billion in 2016, due to an increase in retained earnings of 4.1 percent (2015: 11.5 percent) and Tier 2 capital instruments (5.8 percent). Four banks voluntarily injected additional Tier 2 capital amounting to P240 million. In addition, increases in banks’ capital levels can also be attributed to increases in RWA, as banks grew their loan books. All banks, with the exception of two banks, which paid out dividends, recorded increases in their unimpaired capital,” reads the report.

The report further shares that the country’s financial depth and development indicators improved marginally, with the ratios of Private Sector Credit and Banking Credit to GDP increasing from 31.6 percent and 32.4 percent in 2015, to 31.8 percent and 32.6 percent in 2016, respectively. However, the M2 to GDP ratio decreased from 45.7 percent in 2015 to 42.8 percent in 2016.

“As was the case in the prior year, five banks dominated the banking sector, accounting for 90 percent of total banking assets. There was a dilution of competitiveness, as measured by the Herfindahl-Hirschman Index (HHI), during the year. However, the banking sector remained moderately competitive. The pressure on banks to innovate, develop and improve their products and services, in order to maintain high profitability levels, is expected to enhance competitiveness.”

The Banking Supervision report suggests that there is still room for more players in the banking sector. 



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