We have extracted the Chairman’s Statement from the 2019 half year report for African Banking Corporation of Botswana Limited (ABC.bw), listed on the Botswana Stock Exchange:
Global and Domestic Economic developments
The general economy showed signs of improvement, having recorded a 4.4% growth year on year in the first quarter of 2019 compared to the prior year. The main drivers for the growth were Trade, Hotels and Restaurants (5.7%) and Transport and Communications (5.9%) as well as a recovery in mining, although global trade wars may impact the recovery of this sector as world economic growth slows. Standard & Poors expects Botswana to experience modest growth in the current financial year, with higher Government spending helping the economy expand by at least 4.2%. The International Monetary Fund expects 3.9% while the African Development Bank projected 3.8%. Looking ahead into 2019, economic growth is expected to be anchored by lower inflationary pressures, accommodative monetary policy stance, increases in Government spending and the recent civil service salary increments. Whilst overall growth is expected, economic output is projected to still remain below forecast potential. Inflation averaged 2.6% in the first quarter of 2019 – a significant decline from 3.3% average in Q1 2018 suggesting a continuance of accommodative and easing conditions by the Bank of Botswana. In August 2019 the Bank of Botswana reduced the bank rate by 25% to 4.75%.
The Bank made significant strides in its transformation strategy in the first half of 2019. The Bank completed migration of key service platforms to new IT infrastructure: Cards and ATMs, following on the migration of the Core Banking platform in the previous year. We completed and started operations in four new Sales and Service centres in Kanye, Letlhakane, Ghantsi and Molepolole which have begun to bear fruit. Additional work was undertaken on crucial transactional banking platforms for both the Retail and Commercial Banking businesses. The Commercial Banking Platform – BancOnline was launched in July. Further improvements to the product complement including introduction of credit cards has just been completed. These enhancements have improved customer sentiment and experience with our services. The Bank’ risk appetite was reaffirmed during the year and a lot of effort went into strengthening the Bank’s risk governance structures so as to protect the bottom line. Significant building blocks have been put in place to prepare the Bank for the future. The Bank launched its brand campaign – Changing For You – in order to keep customer and stakeholder faith in the transformation journey.
Trading conditions in the first half of the year were challenging, with a stagnant first quarter in loan volumes and pickup in activity only seen at the tail end of the second quarter. Overall profitability declined when compared to the same period in 2018, attributable mainly to a rising cost of funds against late asset growth which came after civil servant salary increases in April – not sufficient to materially impact the first half income statement. The later asset growth consequently impacted non funded income through lower arrangement fees. The rise in cost of funding resulted in margin compression, although there have been signs of abatement at the end of the half. Operationally the Bank made a net profit after tax of P51 million which was significantly below H1 2018, although better than H2 2018. Customer deposits closed the year at P6.2 billion which was 2% below prior year, while loans and advances grew 3%. The Bank has a healthy balance sheet with total assets growing from P8.4 billion to P 8.5 billion primarily as a result of the loan book growth.
Net interest income at P192 million was 11% below prior year driven by a 15% increase in interest expense when compared to 2018. Customer deposit interest rates only softened late in the second quarter of the year. The Bank has just recently launched its BancOnline Corporate Transactional Banking Platform with a view to controlling cost of funding and improving its deposit mix which is crucial for success going forward. Included in the interest expense is an amount relating to the implementation on 1 January 2019 of IFRS 16 Leases, an accounting standard that became effective beginning of the year. Non funded income at P52 million is 28% below prior year -foreign exchange trading income reduced substantially as a result of reduction in volumes and margins as we rebuild the Bank’s proprietary trading business.
Impairments and Changes in Expected Credit Losses
The Bank adopted the IFRS 9 impairment calculation methodology at the beginning of 2018. During the period, the Bank had a net impairment release of P13 million on stage 1 impairment and an additional ECL charge of P10 million on stage 3 impairment. The expected credit loss ratios for all financials assets considered for impairments improved to 4.84% as at 30 June 2019 from 5.61% as at 30 June 2018. Generally all lending products experienced improvements in coverage ratios. The improvements were generally as a result of continued efforts during the year to improve quality of model inputs as well improved credit quality of the Bank’s loan book. The improvement in quality of inputs is expected to enable a move to a less penal IFRS9 methodology in the near future.
Operating expenses at P183 million increased by 1% when compared to prior year. The increase in operating expenses of P2 million from prior year was a result of an increase in staff costs (P15 million), depreciation and amortisation (P6 million). General and administrative costs declined by P20 million reflecting better cost management. Increase in staff costs was influenced by salary adjustments, once off transition costs and increase in headcount in line with the Bank’s thrust to build capacity across all business segments.
The marginal decline in customer deposits in the last quarter of the period under review was due to careful management of excess liquidity and cost of funding. The Bank has been focused on building transactional capability in order to bring its interest expense in line with market peers. The customer deposit balance at P 6.2 billion was 2% below prior year. Despite a decline in Corporate deposits by 3%, Retail deposits marginally increased by 4% to close the period at P1 billion for the first time. The net loan book at P5.9 billion is better than the P5.7 billion from prior year, with the Retail loan book growing by 10% compared to prior year. Lending was constrained in the first quarter of the year but picked up in the second quarter on the back of Government employee salary adjustment. Commercial loan book at P570 million was 36% below prior year. Lending to corporates will continue to be reviewed in line with improvements in the cost of funding to maintain profitability.
The Bank’s unimpaired capital and risk weighted assets stood at P1.3 billion and P 6.8 billion respectively resulting in a capital adequacy ratio of 18.8%. The current capital base and forecast profits are sufficient to meet the 2019 bank’s growth prospects as well as dividend commitments.
The Bank achieved a performance in first half 2019 which was significantly lower than prior year, although an improvement in H2 2018 performance. The Bank’s earnings have been variable for the past few years owing to the Bank’s funding structure. Efforts are already underway to address this as a key strategic imperative through a number of initiatives which include enhancing the customer value proposition by introducing more channels, products and ensuring high system availability.
Notice is hereby given that an interim dividend of 2.8 thebe per share for the period ended 30 June 2019 was declared on 25 September 2019 and will be payable on 22 November to those shareholders registered at close of business on 12 November 2019 with an ex-dividend date of 8 November 2019. This dividend will attract withholding tax in accordance with the Republic of Botswana Income Tax (Cap 52:01). The dividend represents 40% of profit after tax for the period ended 30 June 2019.
We extend our sincere gratitude to our customers, the board, management and the entire BancABC team for all the support during the period.
Mrs. Lorato Nthando Mosetlhanyane
Mr. Kgotso Bannalotlhe