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Zambia’s First Quarter Banking Profits Rise

Zambia’s first quarter banking profits rise

Stanbic Bank Zambia Head Office. Stanbic lead the first quarter earnings curve with PAT of K78.80 million with Barclays rallying behind a narrow gap at K73.45 million. Stanchart was in third place at K69.45 million.

  • Profitability skew remains a key concern as 74% of PAT’s resided in 5 banks.
  • Fees and commissions constricted as an autopsy of the unwarranted fee regulation introduced in Q4 of last year.
  • Foreign exchange trading income thinned, reflecting the currency risk off mood.
  • Credit risks in the Q1 were fairly low yet appetite is under threat from potential lowering assessments by rating agencies such as Moody’s.

First quarter commercial banking profits (PAT) for the year 2019 rose to K421.75 million. This was according to quarterly financial statements for the period ended 31 March published in the local press. This translates to 8.43% higher than first quarter of 2018 and 10.31% above the previous quarter. The PAT sprint was led by Stanbic (SBZ) at K78.80 million), Barclays (BBZ) at K73.45 million, Stanchart (SCB) K69.50 million, Bank of China (BOC) at K47.96 million and Zambia National Commercial Bank (ZNCB) at K43.04 million.

INDUSTRY PROFITABILITY SKEW

First quarter earnings shows a profitability skew of 74% of industry PATs generated by 5 commercial banks namely: SBZ, BBZ, SCB, BOC and ZNCB in an industry with 18 financial institutions. This compares to 86% in first quarter of last year despite the number having grown currently in absolute terms.

COMMERCIAL BANKWIDE INCOME ANALYSIS

Total income grew 12% capped by autopsy of unwarranted fee regulation

Earnings were driven by an 11.94% uptick in total income to K2.21 billion from K1.98 billion in the first quarter of last year supported by widened interest income lines on the back on interest from credit extension at K1.15 billion (from K886.59 million) supplemented by a marginal rise in income earned on government securities to K872.17 million from K748 million.

Read also: Stanchart first – quarter profits slump 33%, interest expenses weigh

Fees and commissions were a testament of margin squeeze as an autopsy of the unwarranted fee directive / regulation by the BOZ in Q4:18. Compared with first quarter of last year fee and commission line took a 7.53% haircut to K551.73 million and a 3.55% trim compared to last years fourth quarter levels of K528.90 million. The latter haircut was lower as the directive was only given to the market in the fourth quarter hence full effects were not fully reflected.

Read also: Barclays Zambia Q1 Earnings Levitate 36% Higher

Waning foreign exchange trading income

Foreign exchange trading income slid 10.71% on homogeneous period comparison to K274.85 million from K307.83 million compared to 8.89% decline compared to fourth quarter last year. Market leaders were SBZ, BBZ and SCB as always. The leaning trading income lines is a reflection of the currency market constrained by predetermined spreads that make trading tough in periods of liquidity stress. First quarter trading was slightly muted with one way trade traffic flow in a currency depreciating environment. Market making was challenging in an environment characterized by compounding dollar demand as sentiment continued to sour.

Read also: Stanbic Leads Market Sprint with 23% Stronger Q1 Earnings

COMMERCIAL BANKWIDE EXPENSE ANALYSIS

Interest expenses ballooned 43.22% to K678.99 million from K474.7 million compared with first quarter of last year. This was weighed by a 40.89% rise in interest paid on deposit to K558.18 million from K396.16 million comparing with K446.83 million in fourth quarter of last year. For most banks this interest expense line reflects a rise in cost of deposits bordering on liquidity and the falling in lazy balances for most banks. In the first quarter, more and more commercial banks have been grappling with attracting deposits to fund credit extension but at elevated rates.

Non interest expenses rose to K1.54 billion from K1.37 billion in first quarter of last year and K1.57 billion. The widening of the NIE line is attributed to corporate restructures for some banks that ended up provisioning expenses.

CREDIT IMPAIRMENT ANALYSIS

Commercial bankwide credit impairments in the first quarter to 31 March narrowed significantly to K99.85 million from K306.62 million in first quarter and K301.67 million in the fourth quarter of last year respectively. Most commercial banks had significant recoveries and earned write backs to their income lines. Credit risks remain high as appetite wanes following increased balance sheet vulnerabilities and liquidity concerns. With the current fiscal posture, chances are that the rating agencies could be lowering their assessments as Moody’s advised in a note. The adverse effects of a rating downgrade could tighten credit appetite that would impact interest income lines for banks.

WHAT THE EARNINGS ARE SAYING ABOUT THE MACROS

Using the first quarter performance metrics compared with previous and first quarter of last year, it is evident that currency, credit risks and regulation is weighing the numbers. Given the fiscal challenges the copper producer is facing currency trading is thinning causing a leaner systemic foreign exchange trading line. With fixated bid offer spreads, trading is tough in times of dollar liquidity stress. First quarter was characterized by a higher than usual insatiable appetite for dollars as a safer haven currency amidst waning sentiment given deteriorating fundamentals. Asset sell off pressure is higher forcing yields on government securities which can be seen by the rise in interest income line for securities as banks locked up liquidity in 1 and 5 year treasury assets in the quest to shore up interest revenues. The effects of unwarranted fee regulation are very evident in the haircut observed on the income line. Key commercial banks took human capital restructure decisions which then reflected in the non interest expense lines that ballooned significantly. One thing positive about the banking industry is that it on aggregate level, it is adequately capitalized and has been resilient in turbulence. It is a plus that earnings continue to rise and infact the market could have recorded higher earnings but for the extraordinary lines mentioned that suffered set backs. Credit risks in the first quarter were fairly low yet risks to appetite remain high if the rating agencies such as Moody’s do lower Zambia’s assessment on the back of rising public debt and falling reserves. This could then squeeze interest incomes from loans and advances and widen the interest costs on deposits ultimately eroding earnings and capital buffers.

About the writer: Mutisunge Zulu is an Economist and Finance expert serving as National Secretary on the The Economics Association of Zambia Board.

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