‘RBZ interest rates hike to cause surge in NPLs’


THE decision by the Reserve Bank of Zimbabwe (RBZ) to hike interest rates to 200% could result in increased non-performing loans (NPLs) on current borrowings, a local advisory firm has warned.

RBZ governor John Mangudya announced the hike in interest rates to 200% in July this year as part of measures to discourage speculative borrowing which monetary authorities believe had an adverse impact on exchange rate stability.

In its assessment of the financial results of Zimbabwe Stock Exchange (ZSE)-listed financial institution NMB Holdings Limited for the period ended June 30 2022, IH Securities pointed out that the hike in interest rates will  pose the risk of increased NPLs as well as discourage borrowings in local currency.

“The interest rate hike effected in July to +200% levels will have dampened the demand for new ZWL borrowings and potentially created some downside risk of elevated NPLs on current borrowings as operating margins for borrowers come under pressure with the new finance costs; we anticipate this will have some effect on NMBZH and the wider banking sector from 2H22,” IH Securities noted.

 The advisory firm said the central bank has consistently devalued the official USD-Zimbabwe dollar bank rate and in the current month has observed the beginnings of some convergence with the parallel rate.

“It appears the strategy may be to stabilise the exchange rate at current levels if sustained. This implies a slow-down in revaluation gains in the short term future which have been a main feature of bank earnings including NMB,” it said.

IH Securities said  while  the marked reduction in total cost to income ratio of 47% is a good achievement for the bank, in 1H22, it may also suggest some cost lags which will potentially begin to catch up going forward.

The advisory firm noted that NMB will continue to focus its strategy on becoming a leading technology-based bank and growing digital capabilities and related fees.

“Simultaneously we anticipate a thrust towards growing USD assets and effectively dollarising the interest income stream,” it said.

IH Securities pointed out that the banking sector continues to be vulnerable to an extremely fluid monetary space in which the RBZ has pursued a hawkish monetary policy framework characterised by reduced money supply and elevated interest rates.

It noted that although month-on-month inflation has begun to ease in 2H22, annual inflation remains elevated negatively impacting real returns in Zimbabwe dollar denominated lending businesses

In its financial statement, NMB said it would be scaling up interventions into the export sector as part of a broad plan to increase forex-indexed income.  The financial institution revealed that focus would be devoted to such sectors as horticulture and manufacturing.

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