By Jevans Nyabiage
KENYA: When the State-owned bank National Bank of Kenya (NBK) released its full-year 2012 results late last month, it was evident the financial institution needs a new strategic approach to survive in the competitive banking industry.
As it seemed, former Managing Director Mr Reuben Marambii, described aptly as the grandmaster of turnarounds for reviving the then struggling bank, his strategy now seems to have faltered towards the end of his career at the Bank.
From the results announced by the Bank’s new Managing Director, Munir Ahmed, the institution trails its peers in performance.
It has reported drop in profitability in as many years, with now analysts suggesting that time is ripe for the Bank to change its strategy.
The Bank has for long focused on cutting costs and relied heavily on consumer lending to drive its growth. The institution, ranked Kenya’s eighth largest bank by asset size, halved its dividend as profitability dwindled.
The mid-tier lender cut its dividend to Sh0.20 a share from last year’s Sh0.40 after its net profit dropped by 52.8 per cent to Sh729 million on costly deposits.
Achievements
While other rival banks have been minting hefty cash, with the industry returning 20 per cent in profitability, NBK earnings continued to take a nose dive. There is growing fear that it could slide back to its troubled times unless there is renewed vigour to change its conservative growth plan.
The Bank fell victim to higher cost of capital – through higher interest rates paid to its depositors – and its inability to pass this on in the form of higher interest rates charged to borrowers.
“NBK is swimming against the tide, a tide which has floated the profits of all the banks. The 52.8 per cent dip in final year pre-tax profit in 2012 is a complete outlier when compared with the general trend of other banks’ announcements,” said Aly Khan Satchu, a Nairobi-based Investment analyst.
“The Bank said that profits were crimped by the fact that they did not pass through the higher deposit structure to their customers, in full. I think the Bank is one where it had been tidied up and poised for a ‘go shop’.” The bank’s net interest income fell to Sh4.77 billion last year from Sh5.08 billion in the previous year, and that expenses increased by more than Sh1 billion due to increased investments.
Its customer deposits rose to Sh3.56 billion, which was an increase of 190 per cent from the previous year. Total interest expense more than doubled to Sh3.6 billion. Interest income, however, rose only 30 per cent to Sh8.4 billion, up from Sh6.5 billion recorded in the previous year.
“Looking at the income statement we notice the general trend that blighted the banking sector i.e. high interest rates in 2012 led to swollen interest expenses, as banks fought to attract cheap customer deposits,” said an analysis by AIB Capital Ltd.
In NBK’s case, interest income improved 30 per cent despite the loan book stagnating. On efficiency, the bank operated at a Cost to Income ratio of 75 per cent – way above the sector’s average of 48 per cent and a big increase from 60 per cent achieved in 2011.
“While this increase may be attributed to its growth agenda, it needs to be checked. Moreover employee cost to income ratio worsened from 34 per cent to 40 per cent last year,” said Ted Macharia, an Investment Analyst with AIB Capital Ltd.
NBK’s wage bill has nearly doubled over the past five years to Sh3.1 billion last year, up from Sh1.69 billion in 2008. The employee costs were equivalent to 41 per cent of its total income, more than double the share of Equity Bank, which last quarter also announced a freeze in new jobs.
The most striking feature on the balance sheet is excess holdings of government securities at the expense of loans and advances, which is the bank’s core business.
The loan book constituted 42 per cent of the assets compared to the sector’s average of about 60 per cent.
“Re-engineering of the balance sheet so that government securities holdings fall from 40 per cent of the asset book to about 20 per cent will improve interest income from loans. The balance sheet shrank by two per cent last year,” Macharia added.
In a reflection of a tough macroeconomic environment, gross non-performing loans rose to Sh2.2 billion, up 88 per cent from the previous year. “I think the bank does not have a strategy in place to ride the growth wave,” explained Satchu.
Ahmed, who took over from Marambii in August last year, said the financial institution is diversifying from consumer lending, which accounts for 85 per cent of its loan book, to corporate lending, investing banking and insurance, which he hopes to support future growth. The Bank has for long relied heavily on consumer lending that has seen its rival race ahead of it in recent years.
Big banks like Barclays, Kenya Commercial Bank, and Standard Chartered currently dominate the corporate lending.
NBK has announced plans for a major cash call from its existing shareholders to support its ambitious growth and expansion plan.
The NBK board has outlined a raft of new measures with hopes of transforming the 44-year-old institution into a profitable and competitive banking entity.
Part of the restructuring process includes diversification of the Bank’s balance, which has highly concentrated on retail banking.
NBK is also seeking to lend more to companies and big projects in the property market to grow its loans book and push it to the top tier of the country’s banking sector. It has created a new corporate banking division to rival top lenders like Barclays, KCB and Standard Chartered Bank and reduce its reliance on consumer lending.
In addition the Bank has strengthened the capacity for its Treasury department, recruited new talents in market risk, operational risk and credit risk and revamped customised value prepositions by venturing into Islamic banking.
The bank has hired six executives to head the finance, currency trading, retail banking, Islamic banking and institutional banking divisions in the quest for a larger share of the debt market, currency trading and custody business.
“Now we have diversified our balance sheet and created business units. These two divisions will drive our growth,” explained Ahmed.
“Concentrating on retail business alone is a mistake by the bank. We have now taken deliberate measures to diversify our balance sheet.”
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