Farai Mabeza, Senior Staff Writer 
ZIMBABWEAN banks have been reaping huge profits, which are mostly inflation driven but as the economy stabilises, the trend is expected to taper off, a new report has shown.
The report, prepared by IH Securities, predicts that the country’s inflation, which has fallen from 838 percent last July to 50 percent in August, would continue on a downward trend into 2022, despite an increase to 52 percent in September.
The research firm said the stability would be anchored by, among other things, the record agriculture harvest in 2021 and an expected full reopening of the economy on the back of a successful vaccine roll-out programme.
Governor of the Reserve Bank of Zimbabwe, John Mangudya.
“Profitability metrics for the sector have been elevated over the past two years, owing to inflation driven earnings and non-cash revaluations. However, we have observed more stable economic indicators over the past 12 months, particularly inflation and exchange rate, we forecast this stability to spill over into 2022,” the report said.
“On this backdrop, we expect margins to correct downwards while revaluations are expected to smoothen — interim results being released in the June 2021 period are already reflecting this trend.
“As a result, we believe the current valuations (on the Zimbabwe Stock Exchange) are not sustainable as earnings moderate; we recommend reducing exposures to the banking sector at these levels,” it added.
Zimbabwe banks are currently trading above their historical average multiples as well as above comparable regional banks in more stable economic environments, according to the report.
Banking sector profitability as measured by return on equity (ROE) and return on assets (ROA) continued to increase with ROE closing the year 2020 at 46 percent compared to 33 percent recorded same period 2019, while ROA closed the year at 14 percent, five percentage points higher than prior year’s ROA of nine percent, the report said.
However, annual inflation closed the year at 188,9 percent, which translates to a negative real rate of return.
“Despite the fact that ROA has been increasing over the past five years, it still underperforms annual inflation rate. Although month on month inflation has been going down lately, we anticipate annual inflation rate to close the year still higher than ROA.
“We forecast negative returns in real terms. However, we expect the banking sector to maintain its resilience on the back of stabilisation and financial stability enhancement measures. With the introduction of US$ denominated loans, which mainly target exporters and to some limited extent those in the diaspora, we are of the view that banks will start realising real returns,” IH said.
The banking sector continued to improve its loan portfolio quality as reflected by a decline in the non-performing loans to total loans ratio from 1,75 percent to 0,31 percent year on year. However, the country’s deposit base continues to lean towards demand deposits which limits the sector’s ability to lend long term funds.
“This will continue to hamper efforts to grow capital intensive industries,” the report said.
The country’s deposit base continues to lean towards demand deposits which limits the sector’s ability to lend long term funds. IH said this will continue to hamper efforts to grow capital intensive industries.
Foreign currency accounts deposits, which triggered the overall growth in deposits post translation into ZWL at auction rate are now a significant part of the base as at December 2020, estimated at US$1,26 billion.
“We hope to see banks beginning to test the waters more actively in US$ lending. Commercial banking sub-sector saw a significant growth in deposits closing the year with deposits worth $186 billion, which accounted for 91 percent of the total banking sector deposits as at December 31, 2020,” IH said.
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