Capital Ethiopia Newspaper

Share of private banks’ deposit declines

The growth of private bank deposits in the Ethiopian economy has declined for the first time in 14 years. Deposit, one of the key drivers of banking activity, is expected to slow down from 36 percent in 2011 to less than 24 percent in 2012, Access Capital’s research wing finding disclosed.
“The banking sector outlook has changed markedly in recent months, especially for private banks. Contrary to our expectations last year, we think growth in deposits will slow towards 20 to 25 percent per year rather than the 30 to 35 percent rates seen in recent years.  This anticipated slowdown reflects tightening monetary policies and the strong competitive pressures private banks are now facing from the fast-expanding state-owned banks,” states the research.
Slower deposit growth at the private banks implies a slowdown in loans.  This will be partly offset by a reserve requirement reduction enacted in early January 2012, at least temporarily, argues the Access Capital Research banking review. 
The National Bank of Ethiopia (NBE), the regulating arm of financial affairs in the country, has lowered the minimum ratio of deposits to be held in the state’s reserve to 10 percent from 15 percent which became effective January 2, 2012. NBE also eased liquidity requirements tightened back in April 2010, to 20 percent down from 25 percent.
“The 14 private banks operating in the country have an estimated deposit of 55 billion birr as of December 31, 2011. The recent reserve requirement reduction of five percentage points is freeing up about 2.75 billion birr of funds for private banks which is equivalent to 10 percent of their loan stock in end of June 2011. And this is indicative of the extra loan growth that is now possible just from the disbursement of released funds,” says the report.
On the international banking side of the financial business, foreign asset growth can be sustained at about 20 to 25 percent per year, given the continued strong performance of exports and the overall balance of payments, the review further states.
Access sees average returns on equity trending towards 20 percent rather than the 30 percent-plus seen in recent past.
Ethiopia’s private banks ended the last fiscal year profitably. However, market conditions have changed markedly in the past few months and the outlook for 2012 and beyond is now much more challenging than could have been anticipated just a short while ago.
In terms of market concentration, the ‘large six’ private banks; Dashen, Awash, Abyssinia, United, NIB, and Wegagen; continue to hold dominant shares but the ‘small eight’ banks Zemen, OIB, LIB, Berhan, Buna, Abay, OCB and Addis,  are now reaching a 14 percent market share on most financial measures while 86 percent goes to the six. With respect to the composition of deposits across banks, the reliance on checking deposits is anticipated to vary from a low of 22 percent to a high of 54 percent while the use of time deposits ranges from a low of one percent to a high of 42 percent. 
In relation to income sources, a roughly even split is seen between those banks who tend to rely on loan income versus those reliant on international banking or other income. Lending patterns continue to vary widely among banks reflecting their strategic preferences as well as varying degrees of success in entering particular business segments.
With regard to profitability metrics, Access sees large variations in both returns on equity, which range from a low of 10 percent to a high of 53 percent, and in cost-to-income ratios, which are as low as 22 percent in some cases and as high as 43 percent in others.