Top banks hit by shrinking profit margin on loans

Kenya’s top two banks by profitability, KCB and Equity, have recorded a drop in profit for the third quarter between July and September, reflecting shrinking profit margins amid pressure to reduce the cost of loans. Photos/FILE 

By GEORGE NGIGI

In Summary

• Central Bank of Kenya (CBK’s) data for the third quarter shows the decline in profit margin was replicated across the industry, as the cost of loans dropped at a quicker pace than the deposit rates indicating pressure on the banks to grow their loan books.
• Kenyan banks largely rely on wide interest spreads to grow their profits and their willingness to cut lending rates is a sign of the pressure they are under to grow their loans by making credit more accessible.
• In the nine months to September, the industry has recorded Sh92.5 billion in profits with KCB’s operations in Kenya posting Sh9.4 billion and Equity bank’s Sh8.3 billion.

Kenya’s top two banks by profitability, KCB and Equity, have recorded a drop in profit for the third quarter between July and September, reflecting shrinking profit margins amid pressure to reduce the cost of loans.

Equity Bank’s profit for the three months to September dropped by Sh500 million to Sh2.5 billion, while KCB earned Sh600 million less compared to the third quarter of last year according to data released by both lenders.

Central Bank of Kenya (CBK’s) data for the third quarter shows the decline in profit margin was replicated across the industry, as the cost of loans dropped at a quicker pace than the deposit rates indicating pressure on the banks to grow their loan books.

“Total income stood at Sh88.6 billion, being a decrease of 4.1 per cent from Sh92.4 billion registered in the second quarter of 2013. The decline was partly attributed to the reduction in lending rates,” says the CBK in its quarterly report.

The average lending rate dropped to 16.86 per cent at the end of September, from 17.02 per cent in July according to the CBK data.

The deposit rate dropped at a slower pace during this time from 6.59 per cent in July to 6.55 per cent at the end of September.

Equity Bank’s net interest margin, which is the difference between the lender’s cost of loans and returns paid to depositors, declined to 12.3 per cent in the third quarter from 12.9 per cent a year earlier, while KCB’s dropped to 10.3 per cent from 10.5 per cent.

READ: Equity Bank posts slowest profit rise since NSE listing

Kenyan banks largely rely on wide interest spreads to grow their profits and their willingness to cut lending rates is a sign of the pressure they are under to grow their loans by making credit more accessible.

A CBK survey on bank credit officers revealed there was an increase in demand for loans following the lower interest rates and growing investor confidence.

“Demand for credit generally increased in most economic sectors, with cheaper credit and increasingly available investment opportunities being the main driving factors,” reads part of the survey.

In the third quarter KCB’s loan portfolio increased by Sh10 billion compared to the previous two quarters when it had shrunk.

READ: Subsidiaries, cheap deposits lift KCB profit 15.4 per cent

“Net interest margins continued to contract for the fourth quarter in a row, suppressed by lower lending rates and increasing cost of deposits (interestingly, despite having a higher deposit contribution from current accounts compared to KCB, Equity continues to lag KCB on re-pricing of deposits),” said Standard Investment Bank in a note investors.

KCB said it closed some of its fixed and call deposit accounts so as to cut on cost of funding.