Banks set to post low profits

their interims, which could now weigh down profits when the financial statements are audited and realigned.
Analysts say margins will be reduced because in the interim financial period ended June 2011 financials were unaudited and a true reflection would be obtained in December when the results are audited.
“Year-end figures would be audited and all additives that could have led to a profit would be realigned, thus we are likely to see some banks that made profits recording losses, come December,” said a manager with a local bank.

Banks experienced an increase in credit and liquidity risk since dollarisation and there is a high level of non-performing loans both for individuals and corporates.
By June 2011, deposits reached US$2,9 billion and loans amounted to US$2,3 billion giving a loan to deposit ratio of 81 percent.
“A number of banks have managed to record profits in the unaudited June results. This does not mean that if you managed a profit in June the figure will double for December.

When calculating doubtful debts banks use different ratios but within the range that is stipulated by the Reserve Bank of Zimbabwe. Ratios vary depending on the quality of clients. If a client has a clean repayment history the loan is not classified as a non-performing loan.
For banks, which used high ratios, the amounts would be re-instituted in December and that could improve on their margins.

Banks are exposed to high liquidity and credit risk despite increasing lending to the private sector.
Rapid credit growth creates heightened credit risk and banks are likely to fall prey to this scenario.
Liquidity challenges may trigger bank runs and contagion effect, leading to general loss of confidence in the banking system.

In the near future, non-performing loans could rise while weakly capitalised banks might not withstand significant loan losses.
A local securities firm said the absence of the lender of the last resort or functional money market exposes banks to greater liquidity risks.

“The transitory deposits base is making it very difficult to on-lend on a longer-term basis.
“High bank charges and wide interest rates disparity between deposits and lending rates discourage savings,” said the securities firm.

In the six months, the combined net profit for banks increased by more than two-fold to about US$47 million. This compares favourably to the combined net profit of around US$20 million obtained during the same period last year.
Improved profitability to June 2011 is attributed to strong loan growth and lower overhead costs as most banks retrenched excess staff in 2010.

However, some banks managed to sell off their non-core assets to fund core business of financial intermediation.
Balance sheet analysis for banks during the period under review indicates that deposits are the main source of funding for bank assets.

On average, deposits accounted for 77 percent of bank assets while the bulk of assets were concentrated in loans to customers. The share of loans to total assets improved from 34 percent in 2009 to 55 percent in 2011.

During the period under review most banks managed to re-orient, focusing on core business, which is financial intermediation but still they cannot meet demand for loans.
The loan to deposit ratio rose from 30 percent in 2009 to 81 percent in 2011.