How harder NBE punch newly established banks?

Flourishing new banks in recent years has embarked on the Ethiopian banking bumpy roads. so far so good, hope much of them well understood how it really feels after on boarding than the business plans and pitching they all had. ?Stiffen banking industry competitions and increasing bargaining power of customers coupled with absence of differentiate products and technology in launching years, if not in the years to come, left all with no honey moon and time to think. Dynamic and rush are default for banking industry executives. Above all, it didn’t sound well when the regulatory body break with breaking news in the middle of nowhere. Here we go the new comers!

?Recent monetary policy measures taken by NBE aims to curb the inflation in substantial manner comes to attention everywhere for past few days. The parallel growth movement between inflation and broad money supplies signifies the importance of lowering recent the growth trends in manageable ways sounds timely.

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Broad money and outstanding credit

As per NBE latest reports on quarter II of FY 2022/2023, Broad money supply (M2) stood at Birr 1.95 trillion at the end of the second quarter of 2022/23 reflecting a 33.4 percent annual growth mainly due to a 31.5 percent expansion in domestic credit, offsetting contraction in external asset (net). Likewise, Total outstanding credit of the banking system (including corporate bond) went up by 30.1 percent to reach Birr 1.8 trillion compared to last year same period. Net credit to Government represents more than a quarter of outstanding money supply (Birr 474 bn ) with annual growth rate of 54 percent and which is heavily being driven by a need to finance an enlarged budget deficit.

Net credit to government is the major surge behind last few years upwards trends and a goal to minimize new disbursement to government sounds typical. ?

?Private banks vs state owned banks

Of the total outstanding credit, private banks covered up 52 percent (Birr 925 bn ) while the remaining to state owned banks (Birr 860 bn). ?About 98 percent of the total outstanding credit of private banks goes to private enterprises (Birr 909 bn). On the other hand, from state owned banks, state owned enterprise comprises 80% percent (Birr 690 bn) so of the total outstanding, private sector comprises 18 percent (Birr 157 bn) noting corporate bond outstanding balance of Birr 517 billion (60 percent of state-owned banks outstanding credit and 29 percent of ??overall outstanding credit). Hence, credit capping both the private and state-owned banks (which in turn capping both the private sector and government as stated) equally makes sense.

Private banks are for private sector and state-owned banks are for government and public sector in many forms and performances. Still private sector comprises one trillion (60 percent of outstanding credit). credit capping for private banks still holds.

?Private banks lending Sectors

Private banks Outstanding credit top five sector comprises; export 192 billion (20%), Domestic trade and service 180 billion (19%), manufacturing 135 billion (15%) and building and construction 110 billion (12 %) added to a total of 617 billion or 67 percent of the total outstanding credit. huge influence and bargaining power these sectors have and associated incomes generated, it becomes highly cumbersome for both the government and banks to swiftly change the portfolio nor repress the sectors outstanding credit growth.

past three years fresh disbursement highly influenced by private banks and much of the credit goes to DTS and export sector. On top of that, sectors outstanding composition and balance highly differs from state owned banks.

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Recent resource mobilization performances

Total deposit of the banking system surpasses Birr 2.0 trillion, depicting 33.4 percent annual expansion. Demand deposits, which accounted for 31.8 percent of the total deposits, stood at Birr 626.3 billion. Saving deposit went to Birr 1.2 trillion and accounted for 61.2 percent of the total deposits. share of state-owned banks in total deposit was 49.8 percent and that of private banks 50.2 percent. On the other hand, Currency outside the bank stands 201 billion with annual growth rate of 26 percent. private banks continue to display very high and steadily rising loan-to-deposit ratios, a near 100 percent over the last three years accounting for reserve requirements and banks’ T-bill holdings.

Deposit at private banks surpass those of state-owned banks for the first time and private banks has been more than effecting in managing their funds.

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Profits and source

major contributors to banks continue to be their sizable net interest margins, significant other income mainly driven by international banking activity and Fx, low operational cost.

?Net interest income to income covers 66 percent for both CBE and private banks average. While cost (excluding interest) to income covers 45 percent for private banks while 31 percent for CBE. However, there is great disparity among private banks with regards to income sources and costs incurred.

Major revenue and cost structures variables are almost same for every bank but there is huge disparity among banks and through different periods. Net interest income has been dwindled for some private banks where much of their portfolio affected by conflict and war.

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Third generation banks

Introduction of at least 13 ‘third-generation’ private banks signaled in past few years; these new entrants include Amhara, Ahadu, Siinqee, Tsehay, Hijra, Zamzam, Tsedey, Goh, Omo, Shabelle, Gadaa, Sidama and Ramis banks.

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NBE’s decision to have a flat fourteen percent outstanding credit growth annually taking June 30 ,2023 as base year left 125 billion additional financing to incumbent private banks while third new generation allotted around 12 billion net increment which is 8% of presumed net increments for private banks of Birr 138 billion[1]. Last year average credit growth rate of for incumbent was 34 percent where the Top four private banks cover 50% of total outstanding credit.

14 percent outstanding credit growth for these third-generation banks is more than chocking and considering how competitive and dynamic the industry is getting and economic hardship we all experience.

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Impact of flat ?outstanding credit growth capping considering June 30, 2023 as base line for newly established banks

On financing/credit operations

• Lower base of outstanding credit as of June 30 compared to other banks, makes them less advantaged
• Huge amount of Commitments at hand which many of these banks surpass the annual or semi-annual growth limit set
• Sudden and immediate implementation left no room for preparation or it was before the commencement of budget year
• Nearly 90 percent incomes for these banks comes from lending/financing activity compared 66 of industry average
• Lending as a means to attract high value customers with proven track records to minimize risks and cost of transactions is worth strategy they have been pursuing
• ü Supply chain disruption and internal conflicts which highly impact DTS and export sector leading to NPL challenges where much of these banks’ portfolio falls
• ü The bargaining power of high value customers opting for switching, rescheduling and collection difficulties noting the industry situations

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On investment activities ?

• Existing and expected Huge initial investment and associated cost at early of years of operations compared to the incumbents
• Absence of robust digital and IT infrastructure both to gain other incomes or to automates back-office services to minimize costs
• Inflationary pressures on investments especially in capital items, Fixed assets and house rents investments
• Less attractive form of other investment like T bills and longer periods of time required for larger investments and switching in short periods of time
• Expansions in terms of branches and HR and investment activities are much went on the first quarter

On operation activities

• Challenges in correspondent banking which gives less room for income generate from FX services and FCY earning
• Stiff Guarantee service competitions in the industry with high switching cost to customers whereby declining overall capital and government expenditures exacerbating the situation
• Last year losses for many of these banks and roll over impacts

Recommendations for regulatory organs and third generation banks

• Still, the major driver for recent outstanding credit growth is government. peace and stability is much more critical more than ever.
• June 30 baseline outstanding credit for all banks is not fair for private banks if not third generation banks. ?other parameters or alternatives based on incremental resource mobilized and or sector wise capping shall be tabled as soon as possible. ?
• Private banks especially newly established one shall count the situation to devise new modes of efficient operations and strategies while adapting agile mentality to cope up existing and future competitions by perform stress testing and simulations giving ways to new ideas, business development and technologies. likewise, cooperation and collaboration among banks and fin tech are more than evident and imminent options we all had at hand, liked or not!

References

????????? NBE quarterly Second Quarter Report 2022-23, https://nbebank.com/wp-content/uploads/pdf/quartelybulletin/Second%20Quarter%20Report%202022-23.pdf

·???????? Cepheus research and analytics, Ethiopia Macroeconomic Handbook 2023

[1] Own computation, collected private bank June 30 ,2023 credit O/S positions with annual 14% flat growth rate