Ebola Caused Decline in 7 Banks’ Deposits

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The Central Bank of Liberia’s quarterly report for July through September, 2014 has revealed that developments in the banking sector at September ended showed a significant decline in key balance sheet items, triggered by the outbreak of the Ebola Virus Disease (EVD) which caused a slow-down in normal economic activities during the review quarter.

According to the CBL quarterly report, of the nine banks operating in the country, seven showed declines in deposits, loans and assets, while eight experienced declines in capital during the period of July to September 2014, as a result of the Ebola outbreak.

Though the banking system, continued to be well capitalized and liquid, reflecting continuous confidence in the system, increased financial deepening and economic activities,  however, profitability still remains a challenge due to poor asset quality of a number of banks.  This is due to weak credit administration and the relatively high operating expenses, among others, the report noted.

Expanding further on the banking sector, the CBL disclosed that during the review quarter, balance sheet items, in terms of total assets, declined by 6.0 percent to L$70.6 billion, below the amount recorded in the previous quarter.

“When compared to the corresponding period in 2013, balance sheet items increased by 10.0 percent. Similarly, total loans and advances declined by 7.0 percent to L$27.9 billion when compared to the preceding quarter,” the Central bank said.

The CBL Financial and Economic Bulletin, however, mentioned that they grew by 9.0 percent when matched against the corresponding period in 2013.

The Central Bank indicated that the total capital also declined by 4.0 percent to LS10.2 billion compared to the previous quarter, but experienced 18.0 percent growth over the corresponding period in 2013.

“Deposits, the dominant source of financing of the banks’ asset base, similarly recorded a decline of 6.0 percent to L$43.8 billion at end-September, 2014 when matched against the previous quarter and 3.0 percent over the corresponding period in 2013,” the Bulletin revealed.

The CBL also disclosed that the industry’s Capital Adequacy Ratio (CAR) increased, from 20.7 percent at end-June, 2014 to 24.0 percent at the end of the review quarter.

“All of the nine banks were in excess of the minimum requirement of 10.0 percent. However, with respect to the requirement of net worth, three banks fell below the minimum of US$10.0 million,” the report maintained.

The CBL said the industry’s ratio of non-performing loans to total loans (NPL ratio) increased slightly by 0.8 percentage points to 16.3 percent, up from 15.5 percent recorded at end-June, 2014.

However, compared to the corresponding quarter of 2013, non-performing loans to total loans improved by 4.4 percentage points. In absolute terms, non-performing loans deteriorated by 2.0 percent to L$4.6 billion as at end-September, 2014. Compared with the same period of 2013, NPLs measured in absolute term, similarly deteriorated by 4.0 percent.

The bank said only three of the nine banks reported NPL ratios within the regulatory and permissible limit of 10.0 percent while the remaining six banks were above the limit.

The CBL also observed that weak credit underwriting processes, coupled with inadequate monitoring of loans continue to be the main factors adversely affecting asset quality.

The CBL pointed out that the banking industry recorded gross earnings of L$5.7 billion and an operating profit of L$1.4 billion (before loan loss provisions and taxes) at end-September, 2014, representing growths of 45.0 percent and 32.0 percent, respectively, with 51.5 percent of earnings coming from noninterest sources.

Like the two previous quarters of 2014, the CBL said the industry sustained a net loss position in the review quarter, which stood at L$342.4 million, five of the banks recorded profits, while the remaining four reported net loss positions.

The Central Bank said the banking system continues to maintain a strong liquidity position, recording a liquidity ratio of 45.9 percent at the end of the review quarter. The CBL said: “All of the banks recorded above the minimum required liquidity ratio of 15.0 percent.  Total liquid assets stood at L$20.1 billion comprising of L$2.3 billion or 21.0 percent as vault cash, L$11.5 billion or 57.o percent as foreign bank balances, L$2.1 billion or 10.0 percent as current account balances with the CBL and L$2.3 billion or 12.0 percent as T-bill.”

“This shows that over 50.0 percent of the industry’s liquid assets are held in foreign accounts, which may pose major risk to the system in meeting urgent domestic liquidity needs,”  the report indicated.

However, the high liquidity ratios mitigate such potential future liquidity problems. Loan to deposit ratios both at individual bank levels and industry level have been below 70.0 percent (except for three banks), which indicates a comfortable liquidity position for most of the banks to meet the liquidity needs for their customers.

Despite the growth trends in some balance items as a result of the EVD, the banking system maintained its strong position in key areas of its balance sheet.

The CBL’s credit reference system and the collateral registry are also aiding banks during their credit underwriting processes to ensure they hold quality loans on their books.

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