The slow deposit growth rate demonstrates the liquidity of the banks which has left them walking a tightrope
The private banking sector is facing a squeeze on liquidity, as banks see slow deposit growth. A decline in foreign exchange brought on by a persistent fall in export earnings aggravated the situation.
In the first three-quarters of the current fiscal year, all banks except Lion, Zemen, and Abay saw a mere five percent increase in their aggregate mobilised deposits, to a little over 160 billion Br. The slow deposit growth means the banks are left walking a tightrope with regards to their liquidity.
The report was released in a quarter where the Commercial Bank of Ethiopia (CBE) announced that two billion dollars in foreign currency were available to those wanting to open letters of credit. As a result, the overall growth rate in deposits over the nine months was lower than the rate reported during the first half of this fiscal year, partly because depositors are pulling their money out of private banks and putting it into CBE accounts.
The country is currently in the grips of a foreign exchange shortage that is affecting all businesses.
In a break from previous experience, applicants for foreign exchange are now required to pay 100pc cash in advance to open letters of credit- three times higher than the usual 20pc to 30pc margin.
“The immediate opening of LCs has forced us to operate under expectations,” said a senior executive at Debub Global Bank, where deposits have seen a two percent decline to about one billion Birr.
Andualem Hailu, marketing and communication director of Awash International Bank (AIB), shares that sentiment.
“It puts us under serious threat,” he said. “CBE’s unforeseen move pushes customers to withdraw large amounts of money from us.”
The growth in deposits in the last three-quarters of the year is a complete reversal of the trend observed during the first half when the deposits of private banks bumped up by 30pc to 170 billion Br.
Abdulmenan M. Hamza, an analyst at London Portobello Ltd, sees the seasonality of deposits as the principal reason for the drop in the deposit growth rate.
“This might have been due to the seasonal nature of deposit mobilization,” he said.
Nevertheless, slow growth does seem to be affecting banks’ capabilities to collect more deposit in the remaining months of the financial year. If deposits in private banks expand at this rate into next quarter, the annual growth rate could hit 30pc, a rate that has not been reported since 2010.
“If this rate is achieved next quarter as well, it will be very remarkable for the private banks, said Abdulmenan. “This kind of growth must have been driven by monetization of the economy due to massive branch expansion.”
The deposit growth rate has widely varied across banks. Debub Global registered the lowest growth rate, where deposits have gone down by two percent. Other than CBE’s unanticipated move, the drop in time deposits and demand deposits was another factor in the fall in aggregate deposits.
“We could not collect much from time deposits as it is becoming discouraging,” said the senior executive.” Also, as we were in export season, most of our demand depositors withdraw considerable amounts of money.”
Debub, the last bank to join the financial industry, is the least capitalised bank in the country, struggling to attain half billion Birr paid up capital requirement in the next three months.
On the other hand, Debub’s nearest competitor, Enat reported the highest deposit growth among all private banks in the country. In the past three months, its deposit increased by 15pc to 3.1 billion Br, three times higher than Debub.
“We aggressively did a marketing campaign to raise the number of depositors,” said Wondwossen Teshome, president of Enat. “Our unique approach has also helped us to improve our customer base.”
Sluggish increases in loans and advances accompanied the slow growth of deposits.
The total loans and advances disbursed by private banks have gone up by 10pc to 114.6 billion Br over the past three months. The growth rate is two times lower than that of the rate registered in the first half of the year.
However, the growth seems promising for some industry insiders.
“If the trend continues for the next quarter, the annual growth could be as high as 50pc,” said Abdulmenan. “This kind of rate has not been observed in the past decade. It is very impressive.”
The increase in loans and advances have ranged between the five percent decline at Debub and a 23pc increase at Cooperative Bank of Oromia (CBO).
Debub disbursed 751 million Br in loans and advances in the past nine months, the lowest of all private banks.
“The decline in loan and advances was inevitable because of the smaller deposits,” said a senior executive at Debub.
Tightening liquidity sets back the loan and liquid asset levels as well as negatively affecting banks’ interest rate and profitability, according to previous observations of the industry.
Debub’s loans and advances in the nine months of the report were 19pc higher than the same period last year.
On the other hand, CBO, which saw a plunge in profit last year, presented an impressive performance regarding growth in loan and advances- reaching 9.6 billion Br.
“We have bounced back from last year’s weak performance,” said Deribie Asfaw, president of CBO.
In the first half of last financial year, CBO had the highest growth in deposits, which grew to 35pc. The Bank also underwent aggressive expansion, opening 78 branches in the past nine months, the highest in the industry next to CBE.
“We automatically converted the deposit we collected into income generating activities such as loans,” said Deribie, president of the Bank.
Bank of Abyssinia, which was the third most profitable bank in the first half of the year, came up with a tremendous growth rate of 21pc.
Overall, despite a slow increase in loans and deposits, the loan to deposits ratio of the industry has modestly improved. Each bank, as well as the industry, have shown a remarkable level of loan to deposit ratios in the last three months. Over the past three months, it increased to 72pc from 68pc. The rise is the highest growth recorded so far this year.
Some relate the increase in loan to deposit ratios with slow growth in investments in the central bank’s five-year bond.
“The growth is evident with a huge sum of bonds are due for redemption every year,” said Abdulmenan, the banking expert.
Except for Debub Global and Addis International Bank, all banks improved their loan to deposits ratio (LDPR). AIB has achieved the highest loan to deposits ratio of 78pc.
However, a high loan to deposit ratio may indicate a lack of enough liquidity to cover any sudden fund requests, according to some industry insiders.
Andualem, director of AIB, explains that LDPR is static in its nature, as it varies day to day.
“LDPR alone cannot show the real picture,” he said. “The type of the loan disbursed matters most.”
On the other hand, the lowest LDPR, 66pc, was reported at Wegagen. If there is a further decline, according to some experts, the low LDPR might indicate that the Bank is not using its resources exhaustively to generate income.
Nevertheless, both AIB and Wegagen’s LPDRs are still reasonable to industry insiders.