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Currency volatility piles pressure on banks



THE continued depreciation of the Zimbabwe dollar is piling pressure on local banks to harden their balance sheets as they seek to preserve their capital ahead of the year-end deadline for minimum capital requirements.


The past few weeks have seen most financial institutions publishing their financials and flagging the need to preserve capital as the 31 December deadline approaches.

 The apex bank has more than once extended the compliance dead[1]line timelines due to a weakening economy. The central bank has set varying minimum capital thresholds which should be met by year-end.

 This comes as the discrepancy between the official foreign exchange rate and the parallel market rate narrows. The Reserve Bank of Zimbabwe has maintained a tight monetary stance in an effort to control inflation and stabilise the exchange rate.

 A number of measures and frameworks were in[1]troduced to instil economic confidence, foster market discipline and strengthen local currency demand.

 Key pronouncements made by the monetary authorities included the temporary suspension of lending, entrenchment of the multicurrency system through the willing-buyer willing-seller rate, introduction of gold coins as a store of value and an increase in the bank policy interest rate from 80% to 200%.

The bank policy rate was subsequently man[1]dated to be the minimum lending rate with effect from 1 July 2022. Resultantly, interest rates across the banking sector have increased, with interest rates of 100% p.a. and 200% p.a. being adopted as minimum lending rates to individuals and cor[1]porates respectively.

First Capital Bank says it is now underwriting more loans in hard currency to preserve value. “The rapid devaluation of the ZW$ exerted pressure on capital resulting in the Bank’s US$-denominated core capital having reduced from US$74.8m as at 31 December 2021 to US$44.4m as at 30 June 2022,” reads a statement accompanying the bank’s half-year financial results.

“This level is still above the regulatory mini[1]mum of US$30m with a comfortable margin of safety being maintained. The bank’s capital adequacy ratio remained strong closing the period at 34% which is well above the regulatory minimum of 12%. The bank also operated with a comfort[1]able buffer above the regulatory minimum liquid assets ratio of 30% throughout the period, representing capacity to underwrite more business.”

 Preservation of capital is a conservative investment strategy where the primary goal is to preserve capital and prevent loss in a portfolio.

Capital preservation strategies necessitate investing in the safest short-term instruments such as Treasury Bills and certificates of deposit.

But with TBs currently denominated in the local currency, financial institutions now find United States dollar lending as a viable option.

“It makes sense for banks right now to be talking about capital preservation because their core capital is pegged in US dollar so for tier-1 banks, its US$30 million pegged at the official rate. If you check, the official rate has depreciated by over 70% ever since the year started,” Rufaro Hozheri, a research analyst at Fincent Capital, said.

 “So if you were capital compliant let’s say by 31 December, it’s very possible that by now you are no longer capital compliant. If you talk to POSB, they will tell you that story. So as the local currency is depreciating, banks need to preserve capital; that is why we are seeing an increase in US dollar lending. At least if they lend in US dollars, they will be in a position to preserve their capital because the volatility in US dollars is less than the volatility in the local currency.”

ZB Holdings also says as at 30 June all units within the group, with the exception of its mortgage lending arm, were in compliance with the prescribed minimum capital requirements.

“The group is finalising on options available to address the capital adequacy challenges at ZB Building Society, which are expected to be completed by 31 December 2022,” the group anticipates.

 Ecobank says while it was adequately capitalised by June 30 with total core capital at ZW$23.75 billion (US$64.9 million) during the period under review, the bank “will be deliberate in its capital preservation initiatives”.

 As at 30 June 2022, all of FBC Holdings Limited subsidiaries were in compliance with their regulated capital thresholds and the group seeks to maintain this position.

 “The group’s strategy to invest in inflation-hedging assets has contributed immensely to sustainable capital growth for the subsidiaries, thereby withstanding the negative effects of the deteriorating exchange rate on the capital positions of the banking subsidiaries which are pegged in US dollar equivalents,” the group says.

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