Financial Gazette (Harare)
13 November 2009
analysis
Harare — Confidence and stability in the local financial sector is gradually being restored as 23 out of 26 banking institutions have met the minimum capital requirements as at October 31 2009, thus averting any major potential shocks within the industry.
The dollarisation of the economy and the resulting demonetisation of the Zimbabwean dollar impacted negatively on banking institutions as Zimbabwe dollar deposits were rendered useless.
As a result confidence in the banking sector reached rock bottom with economic agents preferring to keep their foreign currency holdings rather than depositing them with financial institutions. This impacted negatively on the viability of banks which traditionally rely on deposits as the cheapest source of funding.
As at October 31 2009 the total deposits with banks amounted to US$1,016 billion, up 44 percent from US$706 million recorded in June 2009. CBZ had the largest deposits with at total of US$250 million followed by Stanbic with US$150 million while Barclays and Stanchart had deposits of US$112 million and US$103 million respectively. The four institutions held 61 percent of the total deposits.
The sector also registered an improvement in loans and advances amounting to US$501 million from US$263 million in June 2009, which has resulted in a corresponding increase in the sector loans to deposit ratio, which stood at 49,3 percent as at October 31 from 37,3 percent recorded in June this year.
However, most of the lending is limited to short financing for working capital requirements with short payback period. This has prompted the central bank in setting threshold to guide banks in their lending to the productive sectors which required long-term working capital.
Banks are compelled to orient their lending portfolios so as to achieve 30 percent of their deposits to the agricultural sector, 25 percent each to manufacturing and mining sectors and 20 percent to other remaining sectors.
Confidence building in the banking sector is essential to ensure that depositors are comfortable with investing for longer periods. Over 90 percent of the deposits in the economy are under 30 day investments. The dominance of short term deposit together with absence of lender of last resort is affecting the banks' ability to advance money to borrowers. Among the deposits are statutory reserves, FCA balances, ZIMRA money and government money in transit which can not be lent out. It is therefore incorrect to blame the banks for the low loan to deposit ratios without considering the nature of the deposit.
The economic environment will continue to present many challenges, particularly because of pressures emanating from foreign currency shortages. With the unavailability of lines of credit and direct foreign investments in the near future, the liquidity challenges will persist and this impact negatively on the capacity of banks to raise deposits of a long term nature which can allow them to on lend for long term projects.
Most of the lending will remain limited to short financing for working capital requirements with short payback period.
The absence of the lender of last resort will likely see banks continuing with conservative lending policies to reduce the incidence of bad debts.
Meanwhile the equities market rallied strongly this week following positive reports on the outcome of the SADC troika meeting in Maputo last week which put the inclusive government back on track.
A gloomy political outlook had resulted in the stock market taking a huge knock in the last two weeks. Those who heeded our call to "take advantage of what the current market environment presents to 'jump' in into quality stocks" are surely smiling all the way.
The industrial index gained 17,76 percent to end the week on 171,93 points while the mining index gained 21,41 percent to close at 234,18 points, in what is arguably the best week for equity market investors this year.
Movers were led by Zimplow, up 66,7 percent at two cents, followed by CFI, up 53,9 percent at 40 cents and Turnall, up 53,3 percent at 2,3 cents.
Afre and Celsys capped the week's top five movers. Shakers were led by Zimpapers, down 12,5 percent at 0,7 cents, followed by Chemco, down 10 percent at 45 cents and Falgold, down 9,09 percent at 10 cents. NMB and Phoenix complete the week's top five shakers. There were 51 movers and only six shakers in the week.
Investors should however, continue to monitor their investors on the market and use strategies that would benefit them in the long run.
Exposure to the sector should be in companies whose capacity utilisation is commendably improving, (e.g. Innscor, Delta, National Foods) cash generators (e.g. Econet), companies with high growth potential (e.g. Zimplow, CBZ) and aggressively and expertly managed companies that would be able to expand their market share under the obtaining macro-economic conditions.
Volatility in cheaper stocks should remain at elevated levels as short term investors take advantage of the low prices. Even though short-term trading on penny stocks is on momentum, investors should however, look for companies with upside potential of more than 20 percent, low P/E and opportunities for high dividend declarations.
The local bourse's performance is also expected to be severely depressed during the month of December as a result of festive season induced sell offs.
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