The Reserve Bank of Zimbabwe (RBZ) says the banking sector is in a strong position to remain resilient this year and in the short to medium-term, despite financial stability risks associated with the Covid-19 pandemic.
Since the outbreak of Covid-19 nearly two years ago, the pandemic has brought with it risks and uncertainties likely to persist due to the unpredictable path it may take globally, although various efforts, including vaccinations are being undertaken to contain it.
The local banking sector is not immune to such risks but has already shown signs of resilience, which it appears likely to maintain, according to the apex bank.
Zimbabwe anticipates an economic rebound as its extensive Covid-19 vaccination campaign currently underway continues while companies are expected to upscale operations as the economy gradually reopens resulting in increased economic activities, which will spur growth across the different sectors of the economy.
In addition, the ongoing inflation neutral and monetary stabilisation measures are expected to go a long way in mitigating economic and social costs.
For the banking sector, inherent credit risk is likely to remain moderate in the short to medium term whilst operational risk may remain high due the adoption of digital financial services and associated technological advancements.
“Notwithstanding, the banking sector is expected to maintain its resilience in light of strong balance sheets, capitalisation and profitability,” said RBZ in its 2020 Annual Financial Stability Report.
The banking sector reported adequate levels of capitalisation, satisfactory asset quality, earnings and liquidity for the period ending December 31, 2020. Notwithstanding the heightening of inherent risks mainly arising from the Covid-19 pandemic, the sector depicted resilience after adjusting relatively well to the Covid-19 induced difficult environment.
Figures from the RBZ show that all banking institutions recorded profits for the year ended 31 December 2020 with aggregate sector profits amounting to $34,24 billion.
The cost-to-income ratio, however, increased from 59,05 percent as at December 2019 to 71,97 percent as at December 2020 mainly attributable to Covid-19 related expenses.
“Earnings are expected to remain on an upward trend as the sector continues to adjust to new operating conditions through effective risk management systems and digital banking models.
“The contribution of non-interest income to total banking sector income has continued to strengthen over the past few years reflecting increasing diversification of income sources,” reads part of the report.
The sector’s net capital base increased five-fold, to $53,18 billion as at 31 December 2020.
The capital adequacy ratio (CAR), which represents the extent of cushion against unexpected losses, also rose from 32,57 percent in December 2019 to 34,62 percent by end of 2020.
Asset quality remained satisfactory with a non-performing loans (NPLs) to total loans ratio of 0,31 percent by year end down from 1,75 percent as at 31 December 2019.
According to the report, most liquidity indicators showed relative stability between December 2019 and December 2020.
The Banking Sector Soundness Index, however, depicts a marginal increase in risks to liquidity reflected in a decline in the liquid assets to short-term liabilities ratio for commercial banks over the period under review.
“Liquidity risk is expected to remain low due to the envisaged improvement in the operating environment.
“Banks tend to reduce the transformation of deposits into loans as part of a cautious approach to lending in order to contain credit risk and liquidity risk.
“The liquidity stress test results showed that the banking sector is resilient to liquidity shocks,” said RBZ in the report.
During the period under review all banks had a prudential liquidity ratio (PLR) above the regulatory minimum of 30 percent and the banking sector average was 73,06 percent.
Due to the re-introduction of the auction system during the period under review, foreign exchange risk is expected to continue to be moderate in 2021 largely due to the stability in the foreign exchange rate.
Banking Sector Soundness Index, however, showed an increase in risks to sensitivity to market risk attributable to the depreciation of the local currency against major currencies over the period under review.
The sector had a negative net open position which was attributed to foreign obligations such as payment of ICT systems licences, acquisition of ICT infrastructure and legacy debts.
The foreign currency assets constituted 25,65 percent of the total assets whilst foreign liabilities constituted 53 percent of the total liabilities.
Stress test results show local currency volatility may have a marginal impact on the banking sector capitalisation.