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Chronic high inflation remains a threat

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THE high inflation rate remains a major threat to the banking sector’s profitability, with its viability seen heavily dependent on the Reserve Bank of Zimbabwe’s ability control what has proven to be the elephant in the room.

The RBZ adopted a tight monetary contraction policy in 2021 which resulted in the annual inflation rate dropping from 349% in December 2020 to 60.74% in December 2021 and 60.71% in January 2022.

Research firm IH Securities, in its recent 2022 equity strategy, however believes this will be an arduous task for the central bank, considering the country is also importing inflation from global price upticks taking place.

Over the past few years, Zimbabwean banking sector performance has been characterised by sub-inflation interest rates, very low loan-to-deposit ratios (LDR), and negative real return on assets (ROA) ratios.

IH said the poor performance in LDR is due to the short-term structure of most deposits and the sub-inflation

interest rates which discourage lending.

In October 2021, the central bank also revised overnight lending rates from 40% to 60%.

“Under these new operating conditions, we expect an increase in long-term deposits as we anticipate an uptick in savings. We also forecast aggregate deposits to continue on an upward trajectory as the local currency depreciates and higher conversion factor is used to translate US dollar-denominated deposits to RTGS. As of December 2021 foreign currency deposits stood at circa US$1.7 billion. We

expect aggregate loans to inch up on the back of the anticipated increase of long-term deposits and the potential for banks to make profits in real terms,” IH said. 

IH forecasts an increase in loans, especially towards agriculture and mining as the country embarks on expanding production loan-to- deposit ratios is seen  registering  an uptick in 2022 on the back of  the  monetary policy impact on banking.

“We however expect non-performing loans to total loans ratio to slightly increase in 2022 but still remain lower than the generally accepted

international threshold of 5%. We believe the negative effects of Covid-19 on loan performance will persist in 2022. Non-funded income is expected to keep on surging owing to an increase in digitisation which was accelerated by the Covid-19 pandemic,” IH said  

Nevertheless, profitability for the industry as measured by return on equity and return on assets (ROA) is expected to moderate as costs continue to dollarise. 

This is the expected to drive up electricity and fuel costs thus putting margins under pressure.

Zimbabwe’s banking sector has however remained adequately capitalised.

The sector recorded a 19.20% increase in aggregate core capital from ZW$53.18 billion as of 31 December 2020 to ZW$100.83 billion as of 31 December 2021, mainly as a result of the significant growth in retained earnings.–Staff Writer.

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