The changing face of banking in Zim
http://www.theindependent.co.zw/
Thursday, 09 September 2010 17:42
YESTERYEAR, the investment case for venturing into commercial banking was
the prospect of accessing cheaper deposits. Retail deposits come with low
costs as most transactional accounts earn hardly any interest.
Although savings accounts pay interest, the rates tend to be lower than,
say, wholesale deposits. Most of the deposits would be lent to individuals
and companies requiring funding. The net amount arising from the margin
between interest paid and received was, then, the top contributor to
operating revenue for banks. The desire to access cheaper retail deposits
largely explains why many banking institutions that started with lower level
licences such as those for finance houses and merchant banks converted them
to commercial ones.
Even now, a commercial banking licence in this country is still deemed the
ultimate prize in the financial sector. Unlike in the past, the cheaper
deposits are not seen as a source of net interest income anymore, because
lending is no longer considered the lifeline of banking. More revenue has
been coming from non-interest sources like trading, currency dealing,
revaluations on properties and equities, as well as fee and commission
income. Before dollarisation, fair value adjustments on property and equity
investments constituted the bulk of the non-funded revenue.
Hyperinflation forced banks, through their investment vehicles, to hold real
assets to preserve value. As inflation worsened, assets repriced swiftly and
in the end banks would book colossal amounts in the comprehensive statement
of income as revaluation gains. Paper money, it could be said, but all the
same it boosted the financial position of the banks.
Non-interest income still contributes the bigger share of bank revenue –
69,7% – for the 13 commercial banks that have reported June 2010 interim
results, so far, post dollarisation. The difference though is that fair
value gains vanished with the end of inflation. Fee and commission income
now make up the bulk of the non-funded revenue. Using the statistics on the
12 commercial banks that have published their interims out of the 15 active
banks, fee and commission income was 74,6% of non-interest income. The three
banks yet to publish results are Interfin, TN and ZABG.
For the big four banks in terms of assets, namely CBZ, Standard Chartered,
Stanbic and Barclays, fee and commission contributions to non-interest
revenue were 64,5%, 86,9%, 71,7% and 50,4% in that order. For Barclays, the
ratio will be 83,5% if the US$6,5million special support received from the
parent company is removed. The money was used to cover retrenchment costs.
For the second tier banks such as Agribank, FBC, Metropolitan, NMB and ZB
the ratios were 96,7% to 102,5%, implying that fees and commissions
constituted all the non-funded income.
What constitutes fee and commission income? It is generated from overdrafts,
account service, fund management, loan arrangement, advisory services,
custodial services and sales of third party financial products such as
insurance. Whereas commercial banks are allowed to offer almost all of these
products, the merchant banks are largely precluded from doing so. Merchant
banks are not allowed to collect account service charges and overdraft fees
just to name but two. Incidentally, these are some of the most profitable
sources of income for commercial banks. Fees are by and large pure profit
and very lucrative to banks although they tend to be cyclical in nature.
Other non-interest income primarily bank charges is reasonably defensive. As
long as a bank has a stable and large deposit base, it can expect to
continue earning revenue from service charges. June financial results
clearly show that all commercial banks benefited immensely from fees and
commissions.
The growth of fees and commissions ahead of interest income appears to
validate the widespread claim that banks could be overcharging their
customers. Among the believers in this view is the Reserve Bank, which, in
one of their Monetary Policy Statements demonstrated in detail that local
banks were charging more than their peers in the region. Naturally the
banks, through the Bankers’ Association of Zimbabwe, refuted this claim
saying their charges were competitive. All that aside, charges should be set
at levels which not only make the business of banking viable but also foster
the confidence of depositors in their banks. High charges can be a big
disincentive to saving.
There is evidence that the banking model in this country has changed.
Unfortunately, the regulations have not been adjusted in line with the
changing times. For instance, the banking act still segregates financial
institutions into different licenses yet the business environment has pushed
categories such as finance and discount houses to extinction. The revenue
and profitability trends post dollarisation are indicative of the fact that
even the merchant banks could soon be joining the departed duo.
What is needed is a universal banking licence allowing every institution to
offer a broader range of products. There is much talk
about it, but when will it come?
Own Correspondent