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Ethiopian Banks May Be Less Profitable as Deposit Growth Slows

Jan. 16 (Bloomberg) -- Ethiopian banks may become less profitable this year as deposit growth slows and because of a law that requires lenders to buy government securities, Access Capital SC said.

Returns on equity are expected to be about 20 percent in coming years, compared with more than 30 percent previously, the Addis Ababa-based group said in an e-mailed research note on Jan. 11. Total income may also drop because of slower growth in lending and as a “growing share of banks’ assets are placed in low-yielding National Bank of Ethiopia paper,” Access said.

Deposit growth is expected to slow “toward 20 to 25 percent” this year, from 30 percent last year, due to slower money-supply growth and competition from state banks, Access said. Non-government lenders’ share of total deposits fell for the first time in the 12 months to July after rising annually for the past 14 years, it said.

In April, Ethiopia’s central bank introduced a requirement that banks buy government securities equivalent to 27 percent of their total loans to help fund infrastructure projects. The law was applied retroactively to all advances made since July 2010. As of June, banks had bought central bank bills, which carry a coupon of 3 percent, worth 6.4 billion birr ($366 million), or 25 percent of their total loans, according to Access.

“Perhaps the only consolation for banks and their shareholders is that if inflation falls toward single-digits levels, as we expect to occur by, at the latest, June 2012, then the real returns on bank shares will not necessarily decline from recent norms,” said Access.

Inflation in Ethiopia surged to a high of 40.6 percent in August following a rise in global commodity prices and after the government printed money to help finance government spending. Consumer-price growth slowed to 35.9 percent in December, the Central Statistical Agency said last week.

Profit at Ethiopia’s 14 commercial lenders rose 45 percent last year, Access said. The growth was the same as the previous year, it said. Private banking was introduced to Ethiopia in 1993, though foreign lenders are still barred.

To contact the reporter on this story: William Davison in Addis Ababa via Nairobi at pmrichardson@bloomberg.net.

To contact the editor responsible for this story: Paul Richardson in Nairobi at pmrichardson@bloomberg.net.

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