Loan impairments continue to rise

The slugging economy has led to rising impairments as loan repayments remain a challenge, analysts have said.
This has raised fears that banks may cut back on lending critically needed to reboot the economic sectors.

BY VICTORIA MTOMBA

The Reserve Bank of Zimbabwe (RBZ) said as at March 31 2015, 13 banking institutions out of 18 reported profits and a decline in aggregate net profit was recorded to $4,02 million from $22,40 million the same period last year.

RBZ said the decline in aggregate profit was due to loan impairment charges which increased to $40,18 million from $12, 31 million as at the end of March last year and softening of loans. Impairments refer to a reduction in a company’s stated capital or total capital that is less than the par value of the company’s capital stock.
MMC Capital research analyst Kudzanai Samudzi said impairments are going up because the capacity of borrowers to repay loans was waning as the obtaining environment remained a challenge.

“Banks under normal circumstances expect a certain portion of their loan book to underperform, hence formulating provisions for bad debts. As borrowing quality deteriorates, more provisions will be made and more impairment charges [bad debts] will be posted to the income statement. This will trim the bottom line for banks,” he said.
“The coming in of Zamco [Zimbabwe Asset Management Company] is a welcome development, though more needs to be done. There is an urgent need to siphon out a greater portion of bad loans in all the banks, hence creating a much cleaner consolidated balance sheet for the local banking sector. This development will be key in reducing systematic risks,” Samudzi said.

Zamco is a special purpose vehicle set up to buy secured loans, thereby cleaning the balance sheet of banks to be able these to lend. Zamco has so far bought close to $100 million non-performing loans from six banks in the financial sector.

The central bank said credit and liquidity risks remained the major risk facing the sector and it remained high as shown by the average non-performing loans to total loans ratio which declined to 15,19% as at March 31 2015 from 15,91% in December 31 2014.

“The ratio is above the internationally acceptable benchmark of 5%. Banking institutions are instituting various measures to address the challenges of non-performing loans. To mitigate increasing credit risk, the banking sector maintained high liquidity ratios as evidenced by the average prudential liquidity ratio of 34,37% as at March 31 2015,” RBZ said.

A local analyst said the decline in net aggregate profit for banks showed that the losses outdo the profits made by the banks. The analyst said the profits recorded during the first quarter were reduced compared to the same period last year, hence the low profits.

“At least 52 companies closed down last year and some of these companies had loans which have reduced the profitability of banks. Even if banks have reduced loans, they are still yet to receive money from the loans given to customers,” the analyst said.

A local economist Tony Hawkins said the figures reflected what is happening in the economy. He said the “economy is sluggish and the GDP is falling [so] one doesn’t expect the figures to be different”.

The sector’s net capital base increased to $957 million during the first quarter of this year from $926, 57 million end of December 31 2014 and core capital deteriorated to $801, 58 million as at the end of March this year from $811 million at the end of December.

Net capital is a firm’s net worth minus deductions taken from any assets that might not easily be converted into cash at their full value. Core capital is the part of a financial institution’s capital that comprises equity and disclosed reserves.

“The decrease in the aggregate core capital position was largely attributed to losses recorded by a few banking institutions, as well as regulatory adjustments following on-site examinations conducted at some banking institutions during the quarter,” RBZ said.

Total banking sector deposits stood at $5,29 billion with over half of the deposits being demand deposits.
Operating expenses for the sector amounted to $136,78 million for the quarter ended March 31 2015 and were largely composed of salaries and employment benefits which accounted for 47,14% of total operating costs.

The central bank said other non-interest expenses, which included depreciation, deposit protection premiums and administration costs, constituted 47,3% of operating expenses.

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