Strong Banking Industry, Weak Profitability

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The banking sector continued its strong performance for the second quarter of 2014 with key items on the industry’s balance sheet showing improved feat. According to the Central Bank of Liberia (CBL), the sector’s key balance sheet items at the end of June, 2014, were higher than their previous quarter positions. This, according to the regulator, is on account of revaluations of fixed assets and depreciation of the Liberian dollar against the United States dollar.

The Bank reported industry’s strong capitalization and liquidity position, but pointed out that its profitability still remained subtle [fragile or weak] due to poor assets quality of few banks driven by weak credit administration and high operation expenses. The CBL highlights increased in non-performing loans in the industry as discussed below.

On the balance sheet side, however, a data published by CBL for the second quarter of 2014 indicates that the industry’s balance sheet, in terms of total assets, expanded by 9.4 percent to over L$75 billion over the previous quarter and by 20.7 percent over the corresponding period in 2013.

 Similarly, total loans and advances grew by 6.3 percent to L$30.0 billion compared with the previous quarter and 31.4 percent when compared with the same period in 2013. The industry’s total capital also increased by 17.7 percent to L$11.0 billion at end of June, 2014, compared with the previous quarter and 30.9 percent from June of 2013.

 Deposits being the dominant source of financing of the banks’ assets base, however, recorded a decrease of 4.0 percent to L$46.6 billion compared with the previous quarter, but recorded 6.6 percent growth over the figure recorded for the same period a year ago.

 The CBL noted that overall growth rates reflect continuous confidence in the banking system; increased financial deepening and increased economic activities in the country. The capital adequacy ratio (CAR) for the industry, however, decreased slightly from 22.5 percent at the end of the first quarter to 22.3 percent at the end of June, 2014.

 The Bank meanwhile noted that all of the banks are in excess of the minimum requirement of 10 percent when measure by the CAR.

Two banks, names withheld, fell short of meeting the minimum net worth requirement for each bank. “It must be noted that these capital levels are adjusted based on the bank’s international financial reporting system (IFRS) submission to the CBL. That is, the increase in the industry’s net worth is largely due to revaluation of fixed assets to reflect the fair value measurement as well as exchange rate factor,” the CBL stated.

Non-Performing Loans

 The Central Bank also reported in non-performing loans (NPLs). According to the CBL, the NPLs as a ratio of total loans in the industry increased slightly by 1.0 percentage point to 15.5 percent during the second quarter in 2014.

 Despite this slight increase however, NPLs as a ratio of total loan improved by 3.3 percentage points compared with the corresponding quarter in 2013. This means that NPLs deteriorated by 13.9 percent to about L$4.7 billion as at end-June, 2014 in absolute term.

 The CBL declared that six of the 9 banks recorded NPLs loans to total loans above the regulatory limit of 10.0 percent, while the remaining 3 banks fell within the limit.

 The industry recorded gross earnings of L$3.7 billion and operating profit of L$968.3 million [before loan loss provisions and taxes] at the end of the second quarter and this represented improvements by 36.8 percent and 115.4 percent when compared with the corresponding quarter in 2013.

 Like the second quarter in 2013, the industry also recorded a net loss position at end of June, 2014. Five of the banks recorded profits, while the remaining 4 banks recorded net loss positions.

About 51.5 percent of earnings in the industry were from non-interest sources, down from 54.2 percent recorded in the preceding quarter, reflecting the low profitability of financial intermediation in the banking sector, the CBL added.

The composition of the industry’s liquid assets shows that most of the banks’ assets are held in foreign accounts, which the CBL has observed, may pose a potential liquidity risk to the system in meeting domestic liquidity needs.

However, except for two banks, the loan to deposit ratios both at individual bank and industry levels are below 70.0 percent. This, the CBL says is evident of the comfortable liquidity position of most of the banks to meet the liquidity needs of their customers.

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