Highlights from PwC Zambia’s 2019 Bank and Non-Bank Industry Survey

By Martin Bamukunde - Learn more about the author

The fourth edition of PwC Zambia’s Bank and Non-Bank Industry Survey provides insight into many of the key issues, challenges and opportunities for banks and non-bank financial institutions (NBFIs). We requested a single response from each of our respondents representing the view of their respective organisations. Due to the onset of the COVID-19 pandemic, we conducted the survey beyond the usual survey period of December 2019 to 31 February 2020 to take into account developments of up to 31 October 2020. In total, we sent questionnaires to all 18 banks and 47 NBFIs and attained a response rate of 89% and 30% respectively.

Top five issues - banks and NBFIs Common issues Our survey identified the top five issues for the banks and NBFIs as follows:

COVID-19 and the Zambian economy Given the casual relationship between economic growth and the fortunes of the financial services sector, banks and NBFIs remain at risk of being disproportionately impacted by a prolonged slowdown in the economy. In the context of Zambia, these economic challenges have affected banks and NBFIs to varying degrees. It is also generally acknowledged that the full extent of the effects of the country’s pre-COVID-19 economic challenges, compounded by the negative impact of the pandemic, is yet to crystallise.

Specifically, prior to the on-set of the pandemic, Zambia was already grappling with challenges that included fiscal strain occasioned by the country’s debt repayment commitments, the effects of power shortages, exchange rate fragility and rising inflation.

Largely on account of the effects of the COVID-19 pandemic, African Development Bank revised its 2020 growth projections down from 2.4% prior to the pandemic to -4% (best case) and -6.5% (worst case). Travel restrictions and slowdown in global trade have hit the tourism and mining sectors particularly hard and added strain to foreign exchange inflows. As a result, the Zambian Kwacha has depreciated by 16% against the United States Dollar (USD) since the on-set of the pandemic in March 2020 to December 2020. Inflation has also increased from 14.00% to 19.2% during the same period.

*Source: Bank of Zambia

The banking sector has been impacted by these negative trends, with Fitch Solutions forecasting a slowdown in credit growth from 17.7% in 2019 to 7.6% in 2020. This is consistent with the views of respondents indicating that the current economic conditions had resulted in an increase in operational costs, credit risk, slowdown in revenue growth and reduction in profitability.

Credit risk/Non-Performing Loans (NPLs) Over the last three years, the non-performing loans (“NPL”) ratio for banks fluctuated from 9.5% (2018) to 8.2% (2019) to 12.6% (2020). Overall, this fluctuation represents a significant reversal of the gains made in prior years. The NPL ratio increased largely on account of the effects of the COVID-19 pandemic. With respect to NBFIs, the NPL ratio increased from 17.6% (2018) to 22.4% (2019) to 24.9% (July 2020). These ratios are considerably higher than the 10% threshold set by the Bank of Zambia.

The following are the top three factors impacting Non-Performing Loans (NPLs):

In our survey, we asked which sectors represented the largest portion of NPLs in 2019, and both banks and NBFIs identified wholesale, retail trade and agriculture.

"Within any crisis lies opportunities. How the industry responds to these unprecedented challenges, individually and collectively, will shape the nature and complexion of the sector going forward."

Issues specific to banks

Capital management The industry-wide Capital Adequacy Ratio (CAR) is above the minimum prescribed threshold and has only decreased by 1% since December 2019. Further, it remained unchanged in the quarter ended 30 June 2020 – the first quarter since the onset of the pandemic in Zambia. Whether this position of strength can be sustained further into the future remains to be seen.

There is a greater focus on preserving capital in the face of various uncertainties. Given the significant increase in NPLs and the escalating cost of doing business, one source of capital, retained earnings, remains under threat. Although respondents have exhibited confidence in the sector’s overall resilience, they have expressed concern over their institutions’ short, medium and long-term prospects. In response of the impact that the pandemic, Bank of Zambia announced relief measures which included:

Capital instrument concessions
Deferral of the impact of IFRS 9
Liquidity support through the Targeted Medium-Term Refinancing Facility
Facility restructures

Given that these measures were announced in April 2020, it is relatively early to assess the full extent of their effectiveness in preserving the capital position of the industry and their sustainability into the future. That notwithstanding, overall, the above interventions have provided much-needed relief.

Improving revenue growth

The 2019 survey showed that banks registered 13% growth in total net-interest and other income to K10.2 billion (2018: K9.04 billion) which represented a reduction in the 2018 growth rate of 15%. A further analysis of the 2019 growth rate indicated that net interest income growth rate remained stable at 19% (2018:19%) with net non-interest income registering a significantly lower growth rate of 3% (2018: 10%).

Issues specific to NBFIs Managing liquidity risk

In managing liquidity risk, NBFIs consider the source and cost of funding. According to Bank of Zambia statistics for 2019, 38.18% (2018: 42%) of the funding of the NBFIs is sourced from shareholders. Other sources of funding include balances due to foreign institutions and deposits which contribute 43.9% (2018:37.55%) of the remainder. The average cost of funding increased from 16% in 2018 to 18% in 2019. With escalating operational costs, an increase in the cost of funding exerts significant pressure on pricing and profitability. Consequently, NBFIs with limited access to reasonably priced sources of funding experience difficulty in staying competitive.

Escalating cost of doing business

According to the Bank of Zambia statistics for the 2019 period, the cost-to-income ratio for NBFIs increased to 89% in 2019 from 75.3% in the prior year. This significant increase suggests that there is a need for more robust cost efficiency strategies to support sustained growth of the sector.

Conclusion Stability of the economy and re-establishment of sustained growth is dependent on several factors including controlled government spending. Implementation of a debt management strategy in the absence of attaining fiscal consolidation targets is unlikely to deliver the desired outcomes. In 2021, the situation may be further complicated by a propensity towards loose fiscal policies that are not uncommon during an election year. However, within any crisis lies opportunities. How the industry responds to these unprecedented challenges, individually and collectively, will shape the nature and complexion of the sector going forward. The acceleration of digital transformation; reimagining product development; building more trust as banks support their clients through the crisis; and leaner operating structures occasioned by the adoption of new ways of working are all opportunities that the sector should seize. PwC Zambia’s bank and non-bank survey report can be accessed here.

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