Housing Finance, NIC boost profits on cheap deposits

NIC Bank on Wabera Street in Nairobi. The bank is one of the biggest gainers of cheap customer deposits. FILE 

By VICTOR JUMA

In Summary

• Lower interest on clients’ cash to save lenders millions, boosting their earnings.

Cheaper deposits helped NIC Bank and Housing Finance (HF) grow their profits in the three months to March, signalling the benefits banks are deriving from lower interest expenses.

Banks have cut the interest rate on deposits to between six and 12 per cent in the period under review, down from an average of 20 per cent a year earlier.

This is saving the lenders hundreds of millions of shillings, helping them to grow profits by double digits as depositors record lower returns on their cash piles.

NIC and HF, which have published their first quarter results, have benefited significantly from the cheaper deposits in a trend that is expected to be reflected across the banking industry.

NIC Bank is one of the biggest beneficiaries of cheaper deposits, paying interest of Sh1 billion on the Sh78.3 billion worth of customer deposits in the period, down from Sh1.4 billion on the deposits of Sh69.2 billion it collected a year earlier.

This helped the bank grow its net profit 20 per cent to Sh867.7 million from Sh723 million. Its loan book expanded 24.8 per cent to Sh70.6 billion but interest income from the loans dropped 6.4 per cent to Sh2.2 billion, underlining the impact of the interest savings on profit growth.

Housing Finance also cut its interest expenses to Sh400.5 million on the Sh24.5 billion worth of deposits in the first quarter compared to Sh518.5 million a year earlier.

The savings supplemented the bank’s interest income to help it grow net profit 46.4 per cent to Sh195.6 million. HF’s loan book grew 19.7 per cent to Sh31.6 billion, generating an interest income of Sh1.2 billion, which was up from Sh951.5 million the year before.

Cash-rich bank depositors are now looking at returns that are lower or matching those paid on new Treasury bills and bonds whose interest rates range between 10 and 13 per cent.

This has reversed the lucrative earnings seen among depositors early last year when some banks paid up to 25 per cent to attract deposits amid tight liquidity.

This means that any company or individual that deposited money in a fixed deposit account for three months now has the option of leaving such money with the banks for less returns or moving it out to other investment options such as the stock market or off-shore investments.

The steep fall in interest paid on bank deposits is driven by improved liquidity and the move by the Central Bank of Kenya to cut its signal lending rate to 9.5 per cent in the review period from 18 per cent a year earlier.

The rising liquidity and lower Central Bank Rate is also piling pressure on banks to lower their lending rates, with the lenders cutting deposit rates at a much faster rate to protect their margins.

The high interest rate regime last year raised the cost of funds significantly, with some lenders like National Bank (NBK) and Housing Finance taking the biggest hits. NBK’s net profit halved in the year ended December to Sh729 million as interest paid on deposits rose by Sh2.3 billion.