For Kenyan banks, things look good. They are raking in higher profits for the first half of 2013 despite falling interest rates on loans.

Cheaper deposits have helped the lenders post huge profit growth during the period when the demand for loans went up and banks started easing credit terms.

First half results of three large banks — Equity, Co-operative and Barclays — and three medium size banks — Chase, Housing Finance and National Bank, show a sharp drop in the amount of interest paid on deposits, a rise in interest income and an expanding loan book.

Ordinarily, banks conduct business by charging more interest on their loans than they pay out on secure deposits. In banking terms, this is referred to as the interest rate spread; the wider the rate spread, the more a lender makes.

The country’s banking sector posted an aggregate 15.6 per cent increase in profit before tax to Ksh61.5 billion ($715 million) for the period ended June up from Ksh53.2 billion ($631.5 million) posted for the period ended June 2012, according to the Central Bank of Kenya (CBK).

The sector’s loan book rose by an aggregate 15.38 per cent to Ksh1.5 trillion ($17.4 billion) at the end of June, from Ksh1.3 trillion ($15.4 billion) at the end of June 2012.

READ: Kenyan banks post 15.6pc rise in pre-tax profits

“The increased demand for credit was mainly attributed to increased investor confidence as a result of the peaceful political transition, reduction in lending rates, a fairly stable exchange rate and positive economic environment,” said CBK in its credit survey report released last week.

Housing Finance reported a 58.61 per cent increase in profit after tax to Ksh397.12 million ($4.6 million) in the first six months of this year compared with Ksh250.37 million ($2.9 million) posted in the first six months of last year.

Interest paid on deposits dropped by 7.48 per cent to Ksh1.39 billion ($16.2 million) from Ksh1.51 billion ($17.9 million). However, interest paid on deposits by Equity, Barclays, Co-operative and National Bank fell by double digits. Equity’s interest expense dropped by 31.71 per cent, Cooperative 48.12 per cent, Barclays 26.21 per cent and National Bank 38.12 per cent.

READ: Equity links profits to subsidiaries and agency banking

Vimal Parmar, head of equity research at Burbidge Capital, said that some banks had become more aggressive in lending to compensate for lower margins caused by cutting the Central Bank Rate to 8.5 per cent from 11 per cent.

“This might lead to a higher amount of non-performing loans over a longer period,” said Parmar.

ALSO READ: Kenyan banks grapple with growing list of defaulters

Brenda Kithinji, a research analyst with Standard Investment Bank said that interest rates could remain at their current level through the second half of this year and the reduced margins will continue to persist, resulting in some banks becoming more aggressive in their lending.

CBK data shows that the difference between the average lending rate and the average rate that banks have been paying on savings accounts fell to 15.2 per cent in June from 18.8 per cent in June last year, giving an indication of how lower interest rates have been affecting margins.

“Cost of funds for banks will stay low and spreads have been decreasing,” said Kamau Kuria, a research analyst at Kestrel Capital, adding that this will continue to put pressure on banking profits in the second half of the year.

According to a July CBK survey targeting senior credit officers in all the 42 banks and one mortgage finance company, more banks eased their credit standards to meet the increased demand for loans.
The highest demand for credit came from the trade, personal and household, transport and communication and real estate sectors. A third of the credit officers surveyed said that they eased credit standards for trade loans as at June compared with 12 per cent as at March 2013, while 32 per cent said they had eased credit standards for personal and household loans compared with 8 per cent as of March.

Credit standards for loans for the tourism, restaurant and hotels sectors were eased according to 28 per cent of those surveyed, up from two per cent in March while 26 per cent of the credit officers said that they had eased credit standards for loans for manufacturing sector, up from 10 per cent in March.

Competition in the sector and from other lenders such as deposit taking micro finance companies, savings and credit co-operative societies and others, which have been offering lower interest rates, emerged as the biggest factors affecting the demand for credit in the banking sector.

Barclays announce a drop of 12.53 per cent in profit after tax, to Ksh3.73 billion ($43.3 million) for the period ended June compared with Ksh4.26 billion ($50.6 million)  for the period ended June last year, blamed on one off restricting costs. The bank booked Ksh788.25 million ($9.1 million) as an exceptional item related to a voluntary staff retirement programme.

National Bank posted 15.82 per cent increase in profit after tax to Ksh666.24 million ($7.7 million) as at the end of June, up from Ksh575.22 million ($6.8 million) as at the end of June 2012 while Co-operative Bank posted a 17.18 per cent increase in after-tax profits to Ksh4.7 billion ($54.8 million) up from Ksh4.02 billion ($47.7 million) over the same period.