Disease pandemic risks have been a dominant theme in global financial markets in 2020. In Africa’s second largest copper hotspot, Zambia, disease pandemic has manifested in a faster climb in costs than revenue growth for the financial sector, a negative jaws scenario. According to third quarter prudential returns published in the local press, aggregate jaws for the period averaged -8.2% on a year on year basis. This was exacerbated by a 30.6% industry spend jump to K6.25billion surpassing a 21.5% rally in total income to K9.30billion.
Key cost drivers in the period were Zanaco Plc (K1.24billion), Stanbic Bank (K0.92billion) and Standard Chartered Bank (K0.78billion). As per distribution skew the industry had some significant positive jaw prints namely AtlasMara (21.6%) and Stanbic Bank (10.3%) while outliers in negative territory print included Standard Chartered Bank (-47.2%), Citibank (-41.1%) and Zanaco Plc (-8.3%). Industry expenses was exacerbated by a confluence of factors that include COVID spend through emergency response planning homogenous across the industry, management restructures for some banks that are downsizing to lean costs while going digital, currency rout depreciation effects and potential operational write offs occasioned by legal claims to frauds.
Read also: Impairments, COVID spend skid Zambia’s 1H20 banking industry earnings 54%
Industry benchmark cost to income ratio headlined 69.3% which had key banks gyrate both above and below. Banks on the more bullish side of the CTI average demonstrating efficiency include Stanbic Bank Zambia (55.3% vs 59.8%) and Absa Plc (65.2% vs 51.4%) while outliers on the bearish side include Standard Chartered (90.8% vs 62.8%), AtlasMara (78.7% vs 93.7%) and Zanaco Plc (78.2% vs 73.9%).
INCOME GREW BUT AT A SLOWER PACE THAN COSTS
Aggregate total income grew by a 21.5% margin to K9.1billion from a year ago with key contributors being the usual suspects namely Absa Plc, Zanaco Plc and Stanbic Zambia accounting for 48.4% of the overall cake. Non – interest income was propelled 26.3% higher to K3.3billion driven by fee and commission lines dominated by Zanaco Plc while Stanbic bank was market leader in the foreign exchange trading faculty. It is however worth noting that autopsy effects of unwarranted fees have deprived income statements of the healthy lazy margins earned evidenced by slower climbs on the fee- commission lines. Net interest income grew by a 20.5% margin to K5.8billion supported by advances and duration incomes from investment in government securities.
AFTER TAX EARNINGS EBB LOWER
Net profitability ebbed 24.2% to just over a billion Kwacha (compared to a 44.5% ebb in the previous quarter) with winners being Stanbic (K360.5million), Zanaco Plc (K206.3million) and Absa Plc (K110million) weighed by a few outliers such as Stanchart incurring K155.1million loss.
DEFAULT RISKS WILL ERODE FOURTH QUARTER EARNINGS
Credit risks remain elevated with industry impairments jumping 175% to slightly under a billion Kwacha with key contributors being First National Bank (K353.1million), Stanbic (K161.2million), Absa Plc (K195.9million) and Stanchart (K170.1million) accounting for 88.9% in an 18 bank industry. Application of impairments across the banking industry remains inconsistent evidenced by some banks that persistently report lean provisions for the size of credit books and holding in government securities. With looming default risks hovering around Zambia which rating agencies have lowered assessments to selective default which coupled with rising Transfer and Convertibility (T&C) risks will be drivers of waned appetite. Sovereign risks could highly likely erode profitability further in 4Q20 as ideally banks should be adjusting their models for credit quality decline which according to International Financial Reporting Standards – IFRS9 should attract a heavier weighting for risks in government securities.
The Kwacha Arbitrageur