Markets await Eurobond issuance details, Central Bank of Kenya projects
fall in cost of borrowing as appetite for domestic debt wanes. TEA
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Nation Media Group
By A CORRESPONDENT
The subsidiaries of Kenyan banks operating in
East Africa and South Sudan made Ksh3.8 billion ($45.2 million) in
pretax profits in the nine months to September, latest statistics show.
The branches surpassed their total contribution to their parent companies for the whole of last year.
In its latest banking report, the Central Bank of
Kenya attributed the earnings — which are 65.2 per cent higher than the
2011 full year subsidiaries’ profits of Ksh2.3 billion ($27.4 million) —
to increased lending by the units in their respective markets.
The improved earnings, analysts said, were an
indicator that the regional expansion strategy is working, a trend that
should translate into better dividends in the coming years for investors
holding banking stocks.
Growth in profit was mainly supported by the
increase in gross loans and advances from Ksh101.2 billion ($1.2
billion) in June to Ksh118.9 billion ($1.4 billion) in September, said
the CBK.
In its latest review on Kenyan banks released on
Tuesday, Nairobi based Standard Investment Bank (SIB) found that there
was merit for banks to expand across the region mainly due to the higher
interest revenues earned by commercial institutions.
The average interest spread — the difference in
the rate at which banks lend to customers and that which it pays
customers for deposits — across the four countries, Kenya, Uganda,
Tanzania and Rwanda, was 12.7 per cent, with a high of 18.3 per cent in
Uganda and a low of 9.3 per cent in Rwanda, said the report.
SIB however cautioned that expected returns from
different regional markets vary, and management should decide which
markets to operate in. The brief finds that setting up of subsidiaries
is the preferred market entry strategy, and that despite the increased
push by Kenyan banks across the three sampled markets, local banks in
those markets still dominate the market share.
Branch network expansion in the region, combined
with the change in economic activities following mineral and oil
discoveries, has increased the loan appetite for trade and
manufacturing.
“Initially, lending to households was dominant.
But with the oil discoveries and electricity production at Bujagali in
Uganda, manufacturing businesses have a case for setting up resulting in
higher appetite for credit,” said Francis Mwangi, an analyst with SIB.
Data from the Bank of Uganda shows that the value
of loan applications from the manufacturing sector shot up sixfold
between the months of April and May, and have remained high. In May, the
loan applications were worth Ush169 billion ($65 million) compared with
Ush28 billion ($10.8 million) in April. Electricity supply is a key
factor to attracting new investors.
Kenyan banks widened their branch network in the region with 29 new branches in the past three months.
In July, I & M Bank acquired an 80 per cent
stake in Banque Commercial du Rwanda which has 13 branches in that
country. Equity Bank launched operations in Tanzania with five branches,
while KCB — which has been aggressive in South Sudan — invested an
additional Sh200 million ($2.4 million) in its subsidiaries during the
three months.
The improved performance by the subsidiaries is expected to see them lift the parent banks’ performance.
The subsidiaries’ profits accounted for 4.7 per
cent of the total industry pre-tax profits of Ksh80.8 billion ($961.9
million) in the nine months to September, compared with a 2.6 per cent
contribution last year, indicating that their performance is growing at a
faster rate than the Kenyan operations
Lending in South Sudan is yet to pick up, mostly due to lack of
proper land legislation to guide the banks in how to use the asset as
security for loans.
“Apart from regulatory pressure, in the medium
term, we do not foresee any significant structural changes in the sector
that would lead to a drastic drop in spreads,” reads the SIB report.
More Kenyan banks have been spreading their wings
to the region with NIC and CBA entering the Ugandan market, while CFC
Stanbic and Co-operative Bank have set base in South Sudan.
However, the only other East African bank that has
ventured beyond its borders is the Bank of Kigali, which is awaiting
approval from the CBK to open a representative office in Nairobi.
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