Bank shares down 33pc on new loan rates row

The Nairobi Securities Exchange trading floor. FILE PHOTO | NMG

By OTIATO GUGUYU
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Summary

• The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.
• A review of bank stocks shows that Co-operative Bank is currently trading at Sh11.2 down from Sh16.3 at the beginning of the year, Equity Bank at Sh34.4 from Sh54.25, KCB at Sh36.6 from Sh54.25 and Stanbic at Sh80 from Sh109.25.
• Analysts at Egypt-based investment bank, EFG Hermes said approval of risk pricing models by the CBK could lift bank shares.

Bank share prices have fallen by an average 32.8 percent since the start of the year, mainly hit by a decision by the Central Bank of Kenya (CBK) to freeze a bid to raise cost of loans following the scrapping of lending rate controls on November 7, 2019, analysis shows.

The regulator had asked banks to submit new loan pricing formulas that would be the basis of setting interest rates on new credit in an environment where the government was not controlling loan costs.

Approvals on the submissions are yet to be made by the regulator—dimming the performance of bank stocks despite the recent positive sentiments following a phased reopening of the economy by President Uhuru Kenyatta from July 6, after months of a lockdown to curb the spread of Covid-19.

A review of bank stocks shows that Co-operative Bank is currently trading at Sh11.2 down from Sh16.3 at the beginning of the year, Equity Bank at Sh34.4 from Sh54.25, KCB at Sh36.6 from Sh54.25 and Stanbic at Sh80 from Sh109.25.

Analysts at Egypt-based investment bank, EFG Hermes said approval of risk pricing models by the CBK could lift bank shares.

“The ‘Gremlins’ that could potentially derail our positive outlook for the sector are margins remain low for longer than expected as the CBK continues to delay the approval of the banks’ risk pricing models or does not allow the banks to significantly re-price lending rates upwards,” EFG Hermes said.

The CBK, which last year warned banks against reverting to punitive interest rates of more than 20 per cent in post-rate cap regime, wants every lender to justify the margins they put in their formulas.

The government removed the cap after it was blamed for restriction on credit growth during its three years of existence. Banks use a base rate that is normally the cost of funds, plus a margin and a risk premium, to determine how much they should charge a particular customer.

The cap, which set rates at four percentage points above the central bank’s benchmark lending for all customers, had taken out that equation and the flexibility that lenders say they need in order to accommodate customers deemed as risky borrowers.