Banks to feel profit pressure as cost of funding rises

Equity and KCB are some of the Kenyan banks with a regional foot print whose cost of funds remains cheap because they had previously raised funds through their shareholders, which improved their capital adequacy ratios.

The rising cost of funds is the biggest risk facing Kenyan banks in 2012, analysts say, as banks pay high interest rates to access deposits to lend out to customers.

This could slow the pace of profit growth in the sector.

“We see the greatest risk coming through term financing, with some banks paying in excess of 30 per cent for fixed-term deposits,” said analysts from Renaissance Capital.

According to a report by Renaissance Capital, this means banks with a “more generous funding structure”- a high percentage of cheap demand and savings deposits – are likely to weather the storm better than their peers because they get cheap funds and lend at high prevailing rates.

These banks will enjoy a high net interest margin – difference between the interest rate they charge and what they pay for their deposits.

Equity and KCB are some of the Kenyan banks with a regional foot print whose cost of funds remains cheap because they had previously raised funds through their shareholders, which improved their capital adequacy ratios.

Renaissance Capital, in a research report released on Tuesday focusing on Kenya’s banking sector, also said the high interest rate environment will lead to a slowdown in credit growth and an increase in non-performing loans especially among the SME’s, retail and real estate sector.