First quarter commercial banking profitability ebbed 45% lower to K233.6mn compared to a year ago and 27.0% from 4Q19 levels. this was attributed to widening of credit impairments as fiscal posture amplified by COVID risks and a rise in expenses eroded gains generated in the period. Zambia, Africa’s second largest copper producer was by all three rating agencies downgraded after long term issuer rating reviews to ‘Ca’ (Moody’s), ‘CC’ (Fitch) and ‘CCC’ (Standards & Poor’s).
Read also: Fitch lowers Zambia’s credit rating to ‘CC’ from ‘CCC’ on COVID shocks
A tale of Extremes. Amidst economic turbulence, some remarkable performances are observed from the usual suspects that continue to ring fence risks in strategic fashion. Stanbic Zambia is 100miles ahead of the next best performer Bank of China at K157.7mn while the industry observes another outlier in the loss zone, Stanchart Plc incurring a record -K185.8mn. The top 5 performance score board names are Bank of China (K59.5mn), Zanaco Bank Plc (K52.9mn), Absa Plc (K45.0mn) and Citibank (K42.4mn). A bank that has shown immense resilience over the years with steady performance is Indo Zambia that posted K36.8mn after tax earnings driven by increasing income lines as the bank has set its niche in offering digitized products and lending to Small to Medium Sized Entrepreneurs (SMEs).
COVID amplified Fiscal Vulnerabilities. Most of the already existing structural issues Zambia faced pre-COVID such as balance sheet vulnerabilities (exacerbated by infrastructure spend) and energy bottlenecks (and other price related risks) where merely amplified with the advent of disease pandemic, a black- swan event that has distorted the fiscal budget for the red metal producer.
Fiscal posture indirectly ebbed provisions higher. Credit provisioning for the 18 commercial banking industry ballooned 195.4% to K295.0mn year on year compared to 15% expansion from 4Q19. The credit impairment for Q1 is a reflection of fiscal posture as it transmits to the financial system with credit risk models and International Financial Reporting Standards (IFRS9) which are forward looking price in an elevated credit risk environment.
Restructures, Re-modeling and Re-branding Expenses. Aggregated expense base excluding depreciation grew 33.0% to K1.9bn in the quarter fueled by Standard Chartered Bank Plc’s re-modeling and restructure of some business units, Absa Bank Plc’s Africanacity rebranding as it metamorphosised in legal entity from Barclays and Zanaco Plc’s restructure program.
Interest Expenses. Interest costs widened 38.4% to marginally under a million Kwacha with interest on deposits being key driver as the line accounted for 85%. Of the K794.5mn aggregated interest expenses, Zanaco Plc accounted for 16%, as Absa Plc took the second largest chunk at 13% while Indo Zambia Bank had 12% share of the expense line. With the shape of the Kwacha demand curve funding costs are on a climb which the market remains hopeful on a subside if the K10bn monetary stimulus allows for yield curve repricing (between the 12.5% – BPR plus 100bps and the current yields for bills and bonds). The key inhibitor to yield climb down in this case will be government borrowing appetite which could likely negate the effects of an effective MLTR.
Income Growth Still Robust. Aggregate income grew 17.2% to K2.6bn supported by a 28.0% expansion in revenue from lengthened duration in government securities while that from advances was 25.0% stronger. With elevated yields on government securities more banks locked up their liquidity in bills and bonds leveraging off increased borrowing appetite from the state. The risk skew toward shorter dated higher yielding assets (treasury bills) than fixed income (bonds) has persisted. Stanbic Bank had 20% of the total income wallet while Zanaco Plc bagged 19% while Absa Plc took 12%.
Commissions and Foreign Exchange income. Non interest income grew by 38.6% to K1.1bn supported by a 7.0% growth in fee and 97.0% spike in foreign exchange trading income. Fee and commission income expanded by a softer margin of 7.0% as the effects of the Unwarranted Fee Directives by the Bank of Zambia continues to knock earnings capacity of financial institutions. Zanaco Plc had 22% share of this income wallet with Stanbic bank rallying in second place with 19%. Trading income was a winner given the state of the global environment. Foreign exchange trading earnings jumped 97.0% to K543.0mn with Zanaco Plc leading the earnings curve with 26% of the industry share while Stanbic Bank bagged 19% of the cake.
Credit Growth. Aggregate credit growth reveals a 30.0% expansion in the industry asset book to K38.9bn while 52% of this is housed in three banks namely Absa Plc with 19%, Stanbic Zambia 18% and Zanaco Plc with 14% of the advances and loan books leaving 15 banks to share 48%. This distribution skew reveals an anomaly and inefficiency in the Zambian environment. Absa has grown its credit book by 52.2% while Zanaco Plc expanded 30.0% as Stanbic grew 26.2% compared to 1Q19.
Cost to Income. Leaders in the cost to income curve were Bank of China (28%), Citibank (32%), Stanbic Bank (52%), Ecobank (53%), Absa Zambia (60%), First Alliance Bank (63%) and First National Bank (63%).
Banking Outlook. First quarter performance reveals rising credit risks as a consequence of deteriorating fiscal environment amplified by a wave of disease pandemic that has crippled business pulse. Zambia’s junk credit rating, close to the bottom compared to other African nations has resulted in a decline in credit risk appetite which is forecast to worsen in the subsequent quarters as COVID credit risks price in. Th industry grapples with elevated funding costs and deteriorating credit quality of counterparts as sectors remain stressed due to health protocols such as social distancing and partial lockdowns in an effort to curb the deadly pandemic. Asides these threats to growth, Zambia is in the middle of a power crisis and energy price risks that continue to weigh private sector pulse as evidenced by Purchasing Managers Index readings of 37.2 (April) the weakest Zambia has seen in 5 years.
Mining sentiment remains feeble as the sector deals with energy supply uncertainties, weak prices on the London Metal Exchange, litigation and a tax environment that always been a subject of contraversy. Weak mining productivity could ripple effect to downstream businesses on the Copperbelt of Africa to suppress activity to result in potential unemployment and thereby higher cost of living condition. Second quarter performance will provide a fairer picture of COVID effects on the financial sector though some key interventions have been announced in monetary, fiscal and regulatory stimulus to manage credit, solvency, liquidity risks in addition to providing breathing space for business activity to continue. For as long as government spending remains elevated, the industry can expect to grow its interest income even wider but this will overcrowd the industry as it is already. As players await the May Monetary Policy meetings, chances are that the 03 April measures announced by the central bank were an MPC packaged in monetary policy stimulus that came early. Bank of Zambia have little space given the worsened dislocation with the fiscal side.
The year 2020 will be a very challenging year for Zambia, for Africa and for the world.
The Kwacha Arbitrageur
