Rwandan lenders bank on service sector to grow profits

2017 started with industry experts predicting diminished margins for commercial banks.

Customers wait to be served at BPR headquaters. The latest Moody’s report has shown that most African banks have weak risk management structures and little financial and credit data on borrowers, which makes it difficult to assess borrowers’ creditworthiness. PHOTO | CYRIL NDEGEYA | NATION 

IN SUMMARY

  • The performance of the banking sector is largely determined by the performance of the economy itself and that the slow economic growth in 2017 had an impact on the sector.
  • In the third quarter of 2017, the service sector contributed 47 per cent of GDP boosted by the hospitality industry, which saw a 101 per cent growth in air transport.
  • The four listed commercial banks, Equity Bank Rwanda, KCB Bank Rwanda, I&M Bank and Bank of Kigali had a combined increase in profitability of 10.7 per cent, but also cumulatively recorded $43 million in non-performing loans.

The banking sector is betting on the strong growth of the service sector going into 2018 as players try to recover from a year that was characterised by a depressed economy, currency depreciation and bad loans.

“The service sector will continue to drive the banking sector in the coming year. In 2016, the banking sector was largely driven by robust construction, which was not as strong in 2017,” said Maurice Toroitich, the president of Rwanda Bankers Association and managing director of BPR Atlas Mara.

He said the performance of the banking sector is largely determined by the performance of the economy itself and that the slow economic growth in 2017 had an impact on the sector.
The International Monetary Fund (IMF) downgraded its forecast of Rwanda’s GDP growth for 2017 from 6.2 to 5.2.

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“We anticipate 2018 to be a stronger year. As a sector we expect difficulties in the quality of assets, but we are hoping the weather is conducive in the New Year to support agriculture,” said Mr Toroitich.

In the third quarter of 2017, the service sector contributed 47 per cent of GDP boosted by the hospitality industry, which saw a 101 per cent growth in air transport.

Returns

Despite the banking sector still grappling with non-performing loans, industry players expect the sector to post between 11- 12 per cent of cumulative return on capital by the end of 2017. This will be largely due to strong liquidity and banks registering profits.

“The sector’s liquidity and capital adequacy are strong and despite the problem of non-performing loans, these are still in single digits and banks have been profitable,” said Toroitich.
The four listed commercial banks, Equity Bank Rwanda, KCB Bank Rwanda, I&M Bank and Bank of Kigali had a combined increase in profitability of 10.7 per cent, but also cumulatively recorded $43 million in non-performing loans.

Mid this year, non-performing loans stood at 8.2 per cent for the entire banking sector.

The central bank has attributed the increasing non-performing loan levels to a slowdown in economic activity as well as inadequate monitoring of some large facilities.

Risk management

The latest Moody’s report has shown that most African banks have weak risk management structures and little financial and credit data on borrowers, which makes it difficult to assess borrowers’ creditworthiness.

It also said credit reference bureaus are still relatively new in many countries in Africa, meaning they provide rudimentary data and in some cases banks are yet to modify their loan structures to accommodate individual borrower’s information.

2017 started with industry experts predicting diminished margins for commercial banks in the country. This was a result of a weakened local unit against the US dollar, which exposed the lenders to foreign exchange losses during repayment of external loans.

Although the Rwanda franc continued to face sustained pressure throughout the year mainly due to fewer exports against a burgeoning import bill, the banks seemed to have minimised the impact.

Losses

BRD is the only lender that continued to suffer losses because it borrows in foreign currency and exclusively lends in the local currency.

In the second quarter of 2017 imports grew by 39.8 per cent while exports decreased by 10.6 per cent.

At the beginning of December the National Bank of Rwanda was quoting the greenback at Rwf834 buying and Rwf851 selling, in October, the dollar was buying at Rwf832 and selling at Rwf848.
The bond market was vibrant in 2017 with the government issuing a seven-year Treasury bond worth Rwf10 billion ($11.85 million) in November. The money was used to fund infrastructure projects.
The bond had a final coupon and yield of 12.40 per cent and a subscription rate of 178.14 per cent. According to the central bank, a 15-year bond will be issued on February 21, 2018.

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