Banks face depositor crisis

foreign capital injection and deep-pocketed shareholders to operate viably, analysts have said.
Since the introduction of the multiple-currency system in 2009, the sector has faced a crisis of depositor confidence and capital inadequacies.

Prevailing liquidity risk has exposed many banks that are still dealing with liabilities incurred during the 10 years of economic depression.

Liquidity risk is the risk a financial institution encounters in meeting the obligations of its financial liabilities and often arises from the fact that assets and liabilities have differing maturity periods.
An investment banker with a regional bank said most indigenous banks require fresh capital from shareholders and, considering that institutions are struggling to meet the Reserve Bank of Zimbabwe minimum capital requirements, it means there is urgent need of foreign investment.

“What we need now are deep-pocketed shareholders who can put in money to recapitalise these banks,” he said. “As it is, most banks are covering up and, without adequate capital injection, some will collapse.
“Most shareholders are afraid of dilution but they have to think of the survival of the institutions rather than being diluted.”

Recently Renaissance Merchant Bank was placed under curatorship following underhand dealings that left the bank with a negative capital of US$16,7 million against the prescribed minimum capital of US$10 million for merchant banks.

Economic analyst Mr Takunda Mugaga said the RMB issue was an indicator that most banks could have clandestinely sourced funding to meet capital requirements.
“There is so much doubt on the quality of capital adequacy, corporate governance and supervision and this shows us that most banks require fresh funding to operate viably,” said Mr Mugaga.

In a statement on the state of the economy in May this year, Finance Minister Tendai Biti said the banking system remains vulnerable with weak capitalisation, raising non-performing loans and a tight liquidity situation.

He said non-compliance to the minimum capital adequacy threshold by some small banks could worsen vulnerability in the sector.
Reserve Bank Governor Dr Gideon Gono had suggested that banks could merge to meet the minimum capital requirements but the market only witnessed one takeover in 2010.

Pan-African banking group Ecobank Transnational Incorporated last year bought 70 percent of Premier Finance Group in a transaction worth about US$10 million.
This resulted in the dilution of local shareholders. But the new well-capitalised majority shareholders have managed to improve the bank’s balance sheet.

“We are actually expecting other banks to attract well- funded investors but within the guidelines of the country’s empowerment regulations.
“At this point in time we cannot go it alone, we need assistance and if it is done in a proper manner the entire economy will benefit,” added another analyst.

Meanwhile, the International Monetary Fund indicated that Zimbabwe’s financial sector had grown significantly, but its vulnerabilities had recently increased.
“Despite a notable strengthening of macroeconomic performance, vulnerabilities in the banking system have recently intensified, in part because of weak enforcement of prudential regulations,” read part of the IMF statement.

Despite capital inadequacies of banks, the banking sector net profitability improved 232 percent in 2010 with the bulk of their income coming from non-interest income.
Ideally, the main income stream for banks should be net interest, which should be able to cover the bank’s operational costs.
Only two banks, Barclays and Premier, made losses, compared with seven in 2009.
CBZ was the most profitable bank at US$20,9 million, followed by Standard Chartered with US$8,3 million.
Stanbic Bank, a member of the Standard Group, which was voted the bank of the year for 2010, stands at US$7,9 million while Kingdom was at US$4,1 million.
FBC Bank completed the top five list of profitable banks after achieving US$3,7 million in profits. Other noticeable results were realised by POSB with US$3,43 million and BancABC at US$3,39 million.
Out of the 17 commercial banks under review the indication is that aggregate bank assets also improved from US$1,7 billion in December 2009 to US$2,9 billion in December 2010.
However, deposits remained skewed in favour of the top five players with CBZ still leading the pack, controlling 24 percent (US$578 million) of total deposits.
Growth in credit to the private sector during the period under review increased to US$1,6 billion in December 2010, representing an average monthly increase of US$87 million.
The banks are also holding a significant amount of cash and cash equivalent assets, which represent liquid assets.
Ideally, the bulk of cash on hand should be invested in money market instruments such as Treasury bills and bonds.