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Kenya banks to review lending policies

Saturday February 06 2016
bank

Customers in a banking hall. Due to the associated political risks ahead of the 2017 polls, loan growth is likely to remain below trend. PHOTO | FILE

Kenyan borrowers risk losing out on credit as commercial banks review their lending standards in the light of growing political jitters in the run up to the country’s 2017 presidential elections.

Analysts say tighter credit is likely to choke private investment and stifle the budding economy.

However big (Tier 1) lenders will continue to sustain higher margins due to higher yielding retail loans and stronger low-cost retail deposit penetration by virtue of their expansive branch networks and higher investment in mobile and agency banking, according to analysts at the UK-based Exotix Partners.

“Given the presidential elections scheduled for 2017, we believe banks will become more risk averse and thus loan growth is likely to remain below trend at 14.6 per cent,” says Exotix Partners’ market report dated January 15.

“Assuming a peaceful outcome, we expect loan growth to pick up thereafter and thus estimate an average growth of 20.7 per cent  per annum between  Financial Year 2018  and Financial Year 2020,” notes the report.

According to the report titled Place your orders for a perfect banks dawa, the earnings growth momentum and profitability of Kenyan banks have been declining gradually over the past four years primarily due to a drop in margins as a result of declining asset yields (on the back of a low interest rate environment) and increasing funding costs (due to increasing competition from Tier 2 banks).

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However, loan growth for the entire banking sector has increased at a cumulative rate of 17.8 per cent per annum over the past 10 years despite interest rate volatility, driven primarily by increasing penetration within the consumer and the small and medium-sized enterprises (SME) sector.

Kenya’s listed banks lost 22 per cent of their value last year, underperforming the 18.6 per cent and 16.9 per cent drop in the MSCI frontier and MCSI emerging market indices respectively.

This was largely due to an unstable macroeconomic environment characterised by a weakening shilling, surging inflation, high interest rates and the ballooning current account deficit.

Other risks included expectations of a Fed Rate hike, a slowdown in China’s economy, prolonged Eurozone crisis, the significant decline in commodity prices and increasing geopolitical risks.  

“We do not think the primary driver of the underperformance was below par earnings expectations, as the difference in profitability was moderate (especially among the Tier 1 banks). Moreover, a similar drop in the NSE Index indicates a market wide problem,” the report says.

According to Exotix Partners, Kenyan bank stocks are undervalued but mass market banks such as KCB, Co-operative Bank and Diamond Trust Bank offer significant upside potential in 2016.

The analysts say KCB’s share price will grow 77 per cent to Ksh72.7 ($0.71) from the current price of around Ksh41 ($0.4). DTB’s share price will rise 58 per cent to Ksh295.9 ($2.9) from Ksh187 ($1.83) per share while Co-op Bank’s stock is expected to peak to Ksh26.7 ($0.26) from the current price of ksh17.10 ($0.16) per share, a growth of 56.1 per cent.

Analysts at Exotix say Kenya will be a visible out-performer in 2016, growing at 5.5 per cent compared with sub-Saharan Africa’s average of less than four per cent.

“After a difficult year in 2015, when the country seemed to lurch from one small crisis to the next, the conditions are now coming together for a return of confidence,” the report says.

The report says that the interest rates cycle is at a peak, the shilling has been stabilised, inter-bank rates are normalising and lower oil prices will keep easing pressure on the external accounts.

According to a Kestrel Capital market report dated January 2016, Kenya’s Central Bank Rate may be reviewed downwards by 50 basis points this year, to 11 per cent from the current high of 11.50 per cent to spur growth, but this is dependent on the perceived stability of the shilling against the US Dollar.

Kestrel Capital says the economy is expected to rebound in 2016, with the GDP growing from between 5.5 per cent and 5.8 per cent in 2015 to 6 per cent in 2016.

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