Profitability no longer counts in the charter’s call for affordability
It is not difficult to spot the close correlation between Private Sector Credit Extension and local banks’ growth in business volumes. If PSCE grows by 19%, then every commercial bank must strive to grow its new business by at least 19%. If it did not, it indicates a loss of market share.
Two commercial banks reported half-year results this week. Needless to state, these results are impressive, indicating a boiling hot economy. The results are covered in more detail elsewhere in this edition on the Markets page.
When the results of two banks show such good semesters, it will be interesting to compare all results once all the banks have released their financial reports. The conundrum it creates for the Bankers Association is that it weakens the banking sector’s arguments when it has to confront the regulators at the central bank. The local commercial banks are indeed profitable beyond measure, and they are growing at rates that reflect overall economic conditions. Indeed, a very positive indicator for the immediate future.
How does a bank defend its claim that profits will be impaired when bank charges are lowered, if the published results reflect the exact opposite. I can only imagine what heated debate must be carried on at meetings of the Bankers Association where, I am sure, everybody realises one can not hold profitability up as the Holy Grail when the figures explicitly indicate a very prosperous grail.
For the past twenty years, the commercial banks and the central bank failed to find common ground when it comes to the cost of banking. This is one of the reasons that eventually lead to the Financial Services Charter, where the cost of banking was one of the key drivers. Local ownership only became an issue much later.
During these years, through the Bankers Association, it was often demonstrated that the profitability of Namibian banks can not be compared to their South African counterparts. But with economic conditions in South Africa being as disappointing as the past two years, I imagine several of the parents are only too glad that they have such prosperous Namibian children. Still, viewed in context, one must admit to the banks’ point that a single very large branch of a South African parent bank, can post higher revenues than a whole Namibian bank operating on a national footprint.
Whether these arguments will impress the Bank of Namibia remains to be seen. The central bank has consistently gunned for lower banking costs and inclusion of previously excluded clients. Given the recent proliferation of micro banks targeting what was previously called the informal sector, or the unbanked, I believe the presence of these small newcomers have actually made life easier for the big, established banks in the sense that they no longer need to be concerned about banking services to the lowest brackets of the income spectrum. But is will be many years before any of the newcomers will be competitive in conventional retail banking, and by that time, the established banks will also have grown by orders of magnitude.
If I overlook for the moment the differences between the commercial banks and the central bank, I am fairly certain that the financial sector’s stellar performance must serve, to some degree, as confirmation that the counter-cyclical approach by the financial authorities, have finally begun to produce the results that was intended when the process started in 2010.
Commercial banks are the thermometer for the formal economy. If the banks post such impressive growth figures, it means their clients, private business, parastatals and government, must also be doing fairly well.
Shortly we shall expect to see a new national budget. If the banks’ performance is any leading indication, this year’s budget should also not disappoint in terms of projected growth.
Whether it is realistic to expect nominal growth of around 14% again, is a topic which will only get some clarity after the budget has been published. Also, whether the aggressive stimulation of the economy of the past five years can be maintained, will probably be determined mostly by exogenous conditions like capital market participation, the exchange rate, and the domestic inflation rate (note, not the local Consumer Price Index). But if I intentionally reduce the complexity of growth dynamics to its macro elements only, I shall not be amazed if nominal growth approach 20% and real growth reach for 7%. After all, this is not a farfetched notion. Although it is still a little into the future, the proven, real results published by the banks this week, corroborates my view of an over-the-top 2014.