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BoB surprise rate could hurt banks

Publishing Date : 23 February, 2015


Bank of Botswana Governor, Ms Linah Mohohlo and Minister of Finance Kenneth Matambo

The surprise rate cut by the Bank of Botswana on Wednesday is expected to contribute to a weakening profit picture for Botswana’s banks.

Bank of Botswana shocked markets by cutting unexpectedly the bank rate this week, the Monetary Policy Committee (MPC) decided to reduce the Bank Rate by 1 percentage point to 6.5 percent.

Garry Juma, an Investment Analyst with Motswedi Securities told Weekend Post that  they were all shocked by this 100bps unexpected rate cut. “This is bad news for the banking sector,” Juma said.

The Botswana Banking sector profit growth was already under pressure from the liquidity crisis and the two year moratorium in place which already had banks adopting cautious approaches on their loan books.

“Already, interest margins are under pressure and the further interest cut has worsened the situation for the banks,” Juma added.

He noted that however there is more breathing space for the companies and individuals as they can get more funding.

Thabelo Nemaorani, an Economist with E-consult said this is a triple threat for the banking sector.

“The combination of the 2 year moratorium, the liquidity crisis and the bank rate cut makes it so difficult for the banking sector to make profits,” he said.

Nemaorani thinks that the rate cut is not expected to generate much more than incremental demand for borrowing by consumers.

However he noted that “though theoretically the bank rate cut means cheaper access to credit, in the prevailing times of low liquidity there isn’t much to borrow.”

He thinks any loan growth would be more than offset by pressure on the banks’ closely watched net interest margins.

Moatlhodi Sebabole a research manager with FNB said this is good news for the consumers with existing floating rate loans as they will get a relief as interest payments will reduce in accordance with reference rate.

“The purchasing power of these consumers slightly increases as savings on interest payments can be used for consumption or to meet other household demands,” he said.

He added that the declining savings rates would mean consumers have more propensity to borrow than to save and demand for credit will increase as it is now cheaper to borrow, while demand for deposits will decrease.
“Increased spending by businesses and households will increase inflation,” he asserted.

He also warned that Banks interest margins are expected to reduce, thereby squeezing profitability.

“Lending is going to be under more stringent terms as banks are likely to continue reviewing their credit requirements in an environment where credit growth far outpaced deposits growth, this will result in significant decrease in excess liquidity.”

Analysts observe that banks are likely to become more innovative in raising funds matched funding, structured products and capital market issuances. The ongoing liquidity challenge is expected to result in constrained credit growth.

Meanwhile the MPC said total GDP growth is estimated at 4.8 percent in the twelve months to September 2014, reflecting the 5.5 percent and 4.7 percent expansion in mining and non-mining output, respectively. The Committee noted that modest domestic demand pressures and benign foreign price developments are expected to contribute to the positive inflation outlook in the medium term.

“The inflation outlook is subject to downside risks associated with weak global activity and a possible further decline in commodity prices. This could be adversely affected by any unanticipated larger increase than the current forecast for administered prices, government levies and international food and oil prices,” the MPC stated.



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