BANKS’ PROFITABILITY DETERIORATES

MBABANE - The profitability of the banking industry deteriorated over the year to March 2020 as a result of low economic growth and erosion of purchasing power in the household sector.

This is as per the Central Bank of Eswatini’s (CBE) annual integrated report (Report) for the year ended March 31, 2020. The report was released a few days ago. According to the report, as at the end of March 2020, banks’ financial soundness remained strong. Even though banks recorded marginal growth in assets, the cost of funding reduced and liquidity risk remained low.

Environment

“Asset quality continued to improve but it remains a concern, especially as the low interest rates environment encourages excessive borrowing for consumption. Looking ahead, credit quality could be affected by indirect market risks arising from interest rate policy expectations in advanced economies. ‘In addition, there is concern that the implementation of the IFRS 9 Financial Accounting Rule which is likely to increase asset provisioning, as well as the easing of lending standards by banks, could affect banks profitability and solvency going forward,” reported CBE. Nevertheless, banks, according to CBE, remain stable and well capitalised to absorb shocks arising from these factors. Meanwhile, according to the report little is known about the extent of the impact of neither COVID-19 on the economy and financial stability nor how long recovery will take.

Highlighted

“However, continuous monitoring of the pressure on the financial sector is imperative since this sector tends to be pro-cyclical. The Central Bank took measures to support resilience in the banking sector to meet liquidity needs and continue borrowing under extreme conditions presented by the pandemic. It is expected that banks’ asset quality will deteriorate for the remainder of 2020 as credit quality (NPLs) worsens due to rising defaults levels,” highlighted CBE.

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