Non-funded income steers banks to profitability

Published: 04 April 2018

IN 2016, World Economic Forum Geneva founder and executive chairman, Klaus Schwab, said the world is undergoing the "Fourth Revolution", a technological change poised to fundamentally alter the way we live, work, and relate to one another.

What this means is the need to physically do anything will either be greatly reduced or be non-existent at all in the near future, with Zimbabwe's banking sector increasingly benefitting from this trend monetarily.

According to American financial literacy website, Investopedia, banks basically make money by lending money at rates higher than the cost of the money they lend.

"More specifically, banks collect interest on loans and interest payments from the debt securities they own, and pay interest on deposits, and short-term borrowings," Investopedia says.

The interest is what is usually referred to as net interest income.

But, since March 2016 when Reserve Bank of Zimbabwe (RBZ) governor, John Mangudya stated that the central bank would by 2020 seek an 80% cashless society, banks invested more into their IT systems.

Such investments included investing in more point-of-sale (POS) machines and mobile banking application to do transactions to allow bank depositors an opportunity to transact without needing money.

Last year saw an 84% increase in POS machines to 59 939 from 32 629 in 2016, showing banks are pushing clients to more cashless solutions by attacking the areas where they need money the most such as shopping.

Mobile money payment subscribers rose 41% to 4 611 608 from 2016's similar period's 3 279 049.

As a result, depositors either had to get more mobile phones to do mobile banking or debit or credit cards in order to make cashless purchases.

This is evidenced by the fact that the mobile penetration rate increased by 7,9 percentage points to 102,7% last year, as people now own more than one mobile phone on average.

Debit cards increased by 37% to 4 281 683 and credit cards 9% to 17 411 during the same period year.

With charges or commissions for swiping set at a maximum charge on POS transactions at an average of 20 cents and mobile banking charges pegged at an average of about 25 cents, banks started making a lot of money.

Checking bank balances via your phone can cost up to 15 cents, showing banks are enjoying returns on plastic money.

These returns are part of non-interest income, as it is a different income stream from the traditional way a bank earns revenue such as the net interest income.

One only needs to look at CBZ Bank, Stanbic Bank, Standard Chartered Zimbabwe, and Cabs to see the significance of non-interest income compared to net interest income.

CBZ Bank

CBZ group acting chief executive, Peter Zimunya said the bank's profits recorded in its financial statement ending December 31, 2017 of $27,83 million from $23,78 million realised in 2016 were largely due to transactional income.

"Our profit was attributed to transactional income. If you look at our transaction volumes they went up quite exponentially, that's what actually raised our profit. The major contribution is coming from non-interest income," he said.

In the period, the financial group's net interest income dropped by 7,4% to $75,55 million from $81,6 million in 2016.

Owing to this drop was a decline in loans and advances to customers of $941 408 103 for the 2017 period from a 2016 figure of $1 007 172 157.

This proved that the bank was relying on being safe.

But, comparatively, there was a significant increase of 32,3% in terms of net non-interest income to $91,39 million from a 2016 comparative of $69,07 million largely due to these cashless transactions.

With over 400 000 clients and an unabated cashless economy, this means that CBZ is poised to make more money from an increase in cashless transactions from its clients.

Stanbic Bank

Last week, the bank released its financial performance for the 2017 period where the growth in the non-interest income was nearly comparable to the net interest income.

The net interest income as at the end of December 2017 for Stanbic Bank was 16,59% up to $55,087 million from $47,24 million recorded by the end of 2016.

Looking at the bank's loans and advances to customers increasing to $330,4 million from 2016's $273,48 million, it is hard not to see why the net interest income grew.

The bank's chief executive officer, Joshua Tapambgwa, reported that the 2017 fee and commission income dropped to $32,6 million from $33,5 million this was largely attributed to challenges to do with foreign payments.

In terms of an outlook, he said "a mobile banking application (Stanbic App) was introduced for the convenience of our customers. A digital banking centre complimented by free WiFi services is now available in one of our branches and we plan to expand this innovation to all our branches. The bank further expanded its POS terminal footprint bringing more convenience to our customers."

However, looking at the transaction volumes the bank recorded, non-interest income was up 10,64% to $53,86 million for the period under review from $48,68 million in 2016.
This showed that non-interest income was nearly on par with net interest income.

This proves the significance of cashless transactions in contributing to additional revenue to the bank's profits, which helped grow it to $27,62 million at the end of 2017 from 2016's $21,23 million.

Standard Chartered Zimbabwe

In the bank's financial results for the year ending December 31, 2017, Standard Chartered Zimbabwe chairman, Lovemore Manatsa said the bank achieved a positive profit on the back of using more digital banking platforms.

"The bank achieved a profit after tax of $13 million for the year ended December 31 2017, the same asin 2016 despite stronger headwinds. The bank is continuing with its strategy of realigning its business model in recognition of the migration by customers to cheaper digital platforms," he said.

The bank recorded non-interest income that was higher than the net interest income by 16,47% at $33,8 million compared to the net interest income's $29,02 million.

This is despite that loans and advances to customers increased to $152,89 million from 2016's comparative $125,14 million.

Cabs

Cabs chairman, Leonard Tsumba, reported that in the financial year ending December 31, 2017, the building society recorded decreased interest rate margins as a result of market conditions leading to stagnant net interest income but had an improvement of non-interest income.

"Interest rate margins decreased in 2017 as a result of market conditions and RBZ caps on interest rates for productive loans. As a result, net interest income was constant as $59 million (2016: $59 million) despite a 15% growth in loans and advances over the prior year. Non-interest incomes grew by 27% as a result of volumes increases although this was tempered by the regulator caps on certain bank charges," he said.

For the period, fee and commission income rose $57,19 million in the period under review from a previous of $44,28 million recorded at the end of 2016.

Cabs managing director, Simon Hammond said the building society was going to look into more cashless solutions such as POS machines to ease the need for cash from clients.

As the society has more than 300 000 clients, the more Cabs invests in cashless platforms, the more money they can make.

Financial expert, Persistence Gwanyanya told NewsDay that, for a while, there was trend building, where banks non-interest income was on the rise, while the deposit to loan ratio was below 50%.

"It is true. We started to realise this trend a while ago. It is a combination of two things where banks are de-risking on the backdrop of people increasingly using electronic money, as cashless situation remains. Banks are deciding to hold onto their money more due to the situation on the ground," he said.

"Secondly, banks are de-risking by reducing lending, as banks are not confident in lending in this environment. I think in September (last year) the deposit to loan ratio was below 50% showing that naturally the banks' net interest income would decline."

Gwanyanya said that banks were instead holding onto more Treasury Bills as a safer investment, compared to lending, as the TBs were a government guarantee that it could pay back the loans it would have made with the bank.
- newsday

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