Money Markets
By GEORGE NGIGI, gngigi@ke.nationmedia.com
In Summary
- The Kenyan banking industry’s total income for 11 months increased to Sh127bn compared to 2013’s full-year of Sh126bn.
- Analysts attributed the robust profit growth to the high interest margins that banks continue to enjoy while cutting on operating costs.
- Analysts, however, do not expect the profits growth to result in higher dividend payouts due to the impending higher capital requirements for banks.
Commercial banks braved the many challenges in the
economy to close the month of November ahead of the full-year profits in
2013 — giving the clearest signal yet that they are on course to
setting a new profits record this year.
Analysts attributed the robust profit growth to the
high interest margins that banks continue to enjoy while cutting on
operating costs.
“Most banks have taken bold steps to bring down
their cost to income ratios at a time when the interest margins haven’t
changed much,” said Vimal Parmar who heads research at Burbidge Capital.
Official statistics also show a marked increase in
lending between September and November, when the banks dished out Sh38
billion in loans to their customers and expanded the total loan book to
Sh1.95 trillion.
Deposits rose at a slower pace with the savers
having left additional Sh29 billion with the banks increasing total
savings to Sh2.28 trillion.
Mr Parmar said the increased lending signalled rising optimism of Kenya’s growth prospects among investors.
The lenders’ performance cements the financial
services sector’s position as not only the most profitable but also the
most durable, having weathered Kenya’s security challenges and its
impact on the key tourism sector.
Analysts, however, do not expect the profits growth
to result in higher dividend payouts due to the impending higher
capital requirements for banks.
“You have to look at the return on investment
(ROI). This increased profitability is on increased assets so if the ROI
has dipped you don’t expect higher dividends,” said Johnson Nderi, the
corporate finance and advisory manager at ABC Capital.
Beginning January, owners of banks are expected to
pump in more of their own money into the businesses to enable the
lenders take in more deposits and to lend more under regulatory
requirements commonly known as capital ratios.
Some of the lenders such as DTB, NIC and CBA have raised additional capital through rights issues while others like Co-operative Bank plan to retain more of the profits to boost their capitalisation.
Analysts have also pointed out that Kenyan banks
have been structured to grow especially after the monetary policy
committee set a target for their lending to the private sector. Lending
to the private sector is officially expected to grow at 25 per cent this
year.
The sterling profits record has, however, not
shielded the lenders from criticism for pricing credit too high
resulting in a situation where their success is only at the expense of
other segments of the economy that have to pay a high price for capital.
The government has recently introduced a standard base rate,
referred to as Kenya Banks’ Reference Rate (KBRR), to increase
competition among the lenders and ultimately bring down the interest
rates.
Banks have, however, been slow in responding to the
new rate. Most have retained interest rates at previous levels and
classified the difference between the rate and the KBRR as an operating
premium.
Banks are free to load an operating premium on the
standard base rate — a figure that the regulators hope should be each
lender’s mark of distinction.
The KBRR is fixed at 9.13 per cent until January
when it is due for a review. High interest rates have been blamed for
the rising level of loan defaults that hit the Sh108 billion mark
compared to Sh103.7 billion in September.
A loan is classified as non-performing if it is not
serviced for a period of three months. Previously banks had attributed
the defaults to government failure to pay contractors.
But the Treasury has used proceeds of the sovereign bond to clear a large proportion of contractor debts.
To reduce their operating costs, banks have been
retiring expensive deposits and cutting down staff numbers. The list of
lenders who have reduced staff numbers includes Co-operative Bank, KCB, National Bank and Barclays.
The CBK data, however, shows that banks such as
CBA, Consolidated Bank, Co-operative and Citi Bank, are not riding the
profits train having recorded a decline in the nine months to
September.
In the six months between April and October this
year, the interest spread enjoyed by banks dropped marginally to 9.4 per
cent from 10.2 per cent — a level that remains too high compared to
global standards.
The high margins are said to be part of the reason
bank stocks are popular with foreign investors at the Nairobi Securities
Exchange (NSE)
Average lending interest rates stood at 16 per cent in October while the deposit rate stayed at an average of 6.6 per cent.
Average lending interest rates stood at 16 per cent in October while the deposit rate stayed at an average of 6.6 per cent.
The deposit rate is, however, for fixed deposits,
leaving most savings and current accounts savers with rock bottom rates
of below two per cent.
The central bank has said that it is persuading the
lenders to review their pricing of debt even as it puts in place
structures to reduce operating expenses.
The CBK has introduced agency banking, which allows
the lenders to contract third parties to undertake limited transactions
such as cash withdrawals, deposits and balance checks on their behalf.
Besides, mobile banking has helped reduce the lenders operating expenses leaving some latitude to bring down costs.Mr Parmar expects the banks to concentrate on growing transaction
incomes next year as they face increased pressure on interest rates.
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