2
1. EXECUTIVE SUMMARY
1.1. Notwithstanding the challenging operating environment, the banking
sector remained generally stable.
1.2. The banking sector remains well capitalized with 14 out of the 20
operating institutions compliant with the minimum capital requirements
as at 30 June 2014. The remaining non-compliant banks have embarked
on capital raising initiatives to strengthen their capital positions.
1.3. Despite the decline in the overall net income of the banking sector for
the half year ended 30 June 2014, 13 out of 20 operating institutions
recorded profits.
1.4. Credit risk remains a significant challenge facing the banking sector as
reflected by rising non-performing loans.
1.5. A few banking institutions continued to face liquidity challenges.
Capital Banking Corporation’s licence was cancelled with effect from 4
June 2014, following the bank’s voluntary surrender of its licence and
request for cancellation in terms of section 14(4) of the Banking Act on
7 February 2014.
1.6. As at30 June 2014, banking sector deposits amounted to $4.96 billion,
whilst loans and advances were $3.81billion, translating into loans to
deposits ratio of 76.82%. Banks’ lending portfolio continue to be
skewed towards consumptive lending.
3
2. ARCHITECTURE OF THE BANKING SECTOR
2.1. As at 30 June 2014, the architecture of the banking sector was as shown
below.
Table 1: Architecture of the Banking Sector
Type of Institution Number
Commercial Banks 15
Merchant Banks 1
Building Societies 3
Savings Bank 1
Microfinance Institutions 156
3. MACROECONOMIC ENVIRONMENT
3.1. The following characteristics remained prevalent in the macroeconomic
environment during the half year ended 30 June 2014:
a) widening current account balance on the back of progressive
expansion in imports against static exports;
b) low aggregate demand due to low disposable income;
c) low industry capacity utilization; and
d) market illiquidity characterised by transitory nature of deposits,
limited inflows of foreign direct investment and limited foreign lines
of credit.
3.2. The aforementioned macroeconomic constraints and indicators as well
4
as institution-specific deficiencies translated into capitalisation, asset
quality, earnings performance and liquidity challenges at a few banks.
4. CONDITION AND PERFORMANCE OF THE SECTOR
4.1. The performance and condition of the banking sector is summarised by
the key banking sector statistics depicted in the table below:
Table 3: Banking Sector Statistics
Key
Indicators Dec -09 Dec-10 Dec -11 Dec - 12 Dec - 13 Mar -14 Jun - 14
Total
Assets
$2.19
billion
$3.69
billion
$4.74
billion
$6.12
billion
$6.74
billion
$6.81
billion
$6.90
billion
Total
Loans
$693
million
$1.56
billion
$2.76
billion
$3.56
billion
$3.08
billion
$3.82
billion
$3.81
billion
Net
Capital
Base
$382
million
$458
million
$512
million
$644
million
$706
million
*$909
million
*$893
million
Total
Deposits
$ 1.36
billion
$ 2.31
billion
$ 3.04
billion
$4.41
billion
$ 4.73
billion
$4.89
billion
$4.96
billion
Net Profit
$9.50
million
$37.95
million
$86
million
$69.23
million
$4.46
million
*$20.47
million
*$26.53
million
ROA 0.60% -2.02% 2.43% 1.64% 0.06% 0.26% 0.49%
ROE 2.47% 0.57% 15.13% 9.17% 0.51% 2.12% 2.72%
CAR 27.26% 27.34% 13.51% 13.07% 14.01% 14.10% 18.56%
Loans to
Deposits 50.99% 86.25% 90.59% 93.27% 102.36% 78.03% 76.82%
ACL/TL 1.80% 10.95% 7.55% 13.46% 15.92% 16.96% 18.49%
Provisions
to ACL 112.81% 887.71% 57.53% 207.45% 70.88% 46.73% 39.29%
NIM 3.29% 5.75% 8.21% 14.81% 15.26% -0.15% 2.03%
Liquidity
Ratio 97.44% 70.88% 56.80% 55.70% 40.57% 38.10% 38.20%
Cost to
Income
Ratio 94.38% 148.95% 185.11% 99.95% 173.43% 87.15% 164.69%
*Excluding one bank which is under curatorship
5
4.2. The Reserve Bank continues to closely monitor a few banking
institutions with a combined market share of 7.36% in terms of assets,
which were facing liquidity and solvency challenges.
4.3. A summary of the condition and performance of the sector based on the
CAMELS framework is provided hereunder.
Capital Adequacy…
4.4. The banking sector remained adequately capitalised during the period
ended 30 June 2014, with the average capital adequacy ratio above the
required minimum regulatory capital adequacy ratio of 12%.
4.5. The trend in the banking industry’s average capital adequacy ratios
(CARs) from June 2013 to June 2014 is indicated in figure 2 below.
0
2
4
6
8
10
12
14
16
18
20
Jun 13 Sep 13 Dec 13 Mar 14 Jun 14
Pe
rce
nta
ge (
%)
Figure 2: Capital Adequacy Ratio
Capital Adequacy Ratio (%)
6
4.6. The increase in CAR, over the quarter, was attributable to the decline in
risk weighted assets (sector loans & advances) relative to capitalisation
levels.
4.7. Despite the decline in the net capital base and core capital from $909
million and $755 million as at 31 March 2014 to $893 million and
$753.3 million as at 30 June 2014, respectively, the banking sector
remained well capitalized. The decline in core capital is largely
attributed to operating losses recorded by a few banking institutions
during the quarter under review.
4.8. Figure 1 shows the trend in net capital base and core capital levels from
June 2013 to June2014.
Figure 1: Banking Sector Capitalisation Levels
0
200
400
600
800
1,000
30-Jun-13 30-Sep-13 31-Dec-13 31-Mar-14 30-Jun-14
Mill
ion
s
Tier I Capital Net Capital Base
7
4.9. As at 30 June 2014, a total of 14 out of 20 operating banking institutions
were in compliance with the prescribed minimum capital requirements.
Non-compliant banks are taking various measures to regularize their
capital positions which are at different stages of implementation.
4.10. Two banking institutions have already surpassed the minimum capital
requirement targets, effective 2020.
Asset Quality...
4.11. Total loans and advances decreased by 0.26% from $3.82 billion as at 31
March 2014 to $3.81 billion as at 30 June 2014. Generally, there has
been a growth in the level of total loans and advances since 2009 as
depicted below:
705.76
2567.61
3584.57
4220.45 4371.174728.07
4894.74 4,962.07
263.49
1669.3
2839.83
3321.13529.88
3701.11 3819.56 3,810.00
0
400
800
1200
1600
2000
2400
2800
3200
3600
4000
4400
4800
5200
5600
30-
Jun
-09
31-
Dec
-09
31-
Dec
-10
31-
Dec
-11
31-
Mar
-12
30-
Jun
-12
30-
Sep
-12
31-
Dec
-12
29-
Mar
-13
31/
09/2
013
31-
Dec
-13
31-
Mar
-14
30-
Jun
-14
Total Deposits ($M) Total Loans and Advances($M)
8
4.12. Commercial banking institutions continue to dominate the banking
sector as they accounted for 82.02% of total banking sector loans and
advances.
4.13. Six (6) banks had loans & advances amounting to $2.35 billion, which
accounted for 61.67% of total banking sector loans &advances as at 30
June 2014.
4.14. Credit risk remained a key challenge as evidenced by the average ratio
of non-performing loans to total loans (NPL/TL), which increased to
18.49%as at 30 June2014, up from 16.96% as at 31 March 2014. This
trend is partly a reflection of macroeconomic challenges that have
militated against borrowers’ ability to service loans, as well as,
institution specific weaknesses.
4.15. The trend of the banking sector NPLs ratio is depicted below:
9.25%
12.34%
11.46%
13.78%14.20%
13.41%
15.53%15.34%
16.74%
18.70%
9.92%
12.28% 11.59%
13.47%
13.81%
14.51%
15.64%15.92%
16.96%
18.49%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
NP
Ls/
To
tal
Lo
an
s
Figure 3: Trend of NPL's
Commercial Banks Banking Sector
9
4.16. The rise in asset impairment has resulted in a dip in profitability. The
surge in delinquencies and loan losses has dampened banks’ risk
appetite. Resultantly, banks have increasingly adopted a risk averse
approach to lending.
4.17. Banking sector lending was largely for consumptive purposes at the
expense of the key productive sectors, with the individuals or household
sector constituting 24.7% of total credit. Construction and mining
sectors constituted 3.80% and 4.2% of total banking sector credit,
respectively.
4.18. The figure below shows the sectoral distribution of credit as at 30 June
2014:
Figure 4: Sectoral Distribution of Credit
31 March 2014 30 June 2014
Mining9% Construction
3.8%
Financial Firms
2%
Transport2%
Individuals24.4%
Services17.7%
Agriculture4.5%
Manufacturing
14.3%
Distribution13%
Communication
7.4%
Mining
4.2%
Construction
3.8% Financial
Firms
2.0%Transport
2.8%
Individuals
24.7%
Services
17.6%
Agriculture
15.6%
Manufacturin
g
13.7%
Distribution
8.5%
Communicati
on
7.1%
10
Earnings...
4.19. The banking sector remained profitable with an aggregate net profit of
$26.53 million (excluding bank under curatorship) for the half year
ended 30 June 2014, up from $4.90 million during the corresponding
period ended June 2013.
4.20. A total of 13 banks out of the 20 operating banking institutions
(including a savings bank) recorded profits for the half year ended 30
June 2014. The losses recorded by the few banking institutions in the
current period are attributed to high levels of non- performing loans,
lack of critical mass in terms of revenue to cover high operating
expenses and deliberate strategy by some banks to clean up bad loan
books through provisioning.
4.21. The income mix for the banking sector is indicated below.
Figure 5: Distribution of Total Income for periods 30 June 2013 &
2014
Interest Income
61%
Non-Interest Income
39%
Income Mix for the Quarter ended 30 June 2013
Interest Income
63%
Non-Interest Income
37%
Income Mix for the Quarter ended 30 June 2014
11
4.22. The composition of operating expenses is shown in the figure below.
Figure 6: Composition of Operating Expenses
4.23. Profitability indicators for the banking sector as measured by the
average return on assets (ROA) and return on equity (ROE) improved
during the half year ended 30 June 2014compared to 30 June 2013 as
reflected in figure 7.
45%
16%
39%
45%
13%
42%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Salaries and EmploymentBenefits
Provision for Loan Losses Other (Depreciation, Rentalsetc.)
Operating Expenses
June 2013 June 2014
12
Figure 7: Profitability Indicators
Liquidity and Funds Management...
4.24. The trend in the level of deposits is shown below.
4.25. Banking sector deposits continued to be dominated by demand deposits
which accounted for 43.83% of total deposits as at 30 June 2014 as
indicated in figure 8 below:
0.12% 0.13% 0.06%0.26%
0.49%0.59%
-0.24%
0.51%
2.12%
2.72%
-1%
0%
1%
2%
3%
4% Jun 13 Sep 13 Dec 13 Mar 14 Jun 14
ROA ROE
705.76
2567.61
3584.57
4220.45 4371.174728.07 4894.74 4962.08
0400800
120016002000240028003200360040004400480052005600
30-
Jun
-09
31-
Dec
-09
31-
Dec
-10
31-
Dec
-11
31-
Mar
-12
30-
Jun
-12
30-
Sep
-12
31-
Dec
-12
29-
Mar
-13
31/
09/2
013
31-
Dec
-13
31-
Mar
-14
30-
Jun
-14
Total Deposits ($M)
13
Figure 8: Deposit Structure
31 March 2014 30 June 2014
4.26. In terms of concentration, the commercial banking sub-sector dominated
the market for deposits, controlling 83% of total banking sector deposits
as at 30 June 2014.
Fig 9: Distribution of Banking Sector Deposits
Commercial Banks 83%
Merchant Banks 2%
Building Societies 13%
Savings Banks 2%
Demand deposits
58%
Savings deposits
6%
Other deposits
36%
Composition of total deposits as at 31 March 2014
Demand deposits
57%Savings deposits
7%
Other deposits
36%
Composition of total deposits as at 30 June 2014
14
4.27. As at 30 June 2014, six (6) banking institutions had deposits above $300
million each, amounting to $3.35 billion, and representing 67.45% of
total banking sector, indicative of the systemic importance of these
institutions.
4.28. The banking sector average prudential liquidity ratio of 38.20% as at 30
June 2014, was above the regulatory minimum of 30%, and has been
stable since 30 June 2013 as shown below.
Figure 10: Prudential Liquidity Ratio Trend
4.29. While the majority of the banking institutions are compliant with the
38.93% 38.71%
37.64%38.08% 38.20%
25.00%
30.00%
35.00%
40.00%
Jun-13 Sep-13 Dec-13 Mar-14 Jun-14
PLR Quarterly Trend
Prudential Liquidity Ratio PLR Threshold
15
minimum prudential liquidity ratio, the sector is beset by various
underlying liquidity constraints that mirror the real economy structural
rigidities. Consequently, a few institutions faced liquidity challenges
Sensitivity to Market Risk…
4.30. As at 30 June 2014, the banking sector’s sensitivity to market risk was
moderate. The ratio of Rate Sensitive Assets to Rate Sensitive Liabilities
and Net Open Position to Core Capital were 149.16% and 51.99%,
compared to 159.69% and 43.36%, recorded as at 31 March 2014
respectively.
4.31. The table below shows the average interest rate sensitivity ratios for the
banking sector as at 30 June 2014 and 31 March 2014, respectively.
Table 4: Interest Rate Sensitivity Ratios
Period 3 months 6 months 9 months
Mar-14 127.50% 172.70% 159.69%
June-14 145.18% 147.50% 154.80%
30 June 2014