Kenyan bank profits decline over rate caps and falling economic activity

Tuesday November 28 2017

Central Bank of Kenya governor Patrick Njoroge. PHOTO | NMG


Kenyan banks have not had an easy ride in the nine months to September 30, and the full-year outlook for the industry is not promising.

While a combination of external and internal factors have contributed to the poor performance of the industry, analysts and bankers alike are pointing the finger at local politics, slowing economic activity and interest rate caps.

Already banks have begun asking shareholders to expect lower profits as revenues fall, while the share prices of the listed ones have been on the decline.

A review of the performance of selected banks in the nine months of January-September shows decreased interest on loans and advances as well as a drop in profitability.

Standard Chartered Bank Kenya for example, recorded a 38 per cent drop in net profit to Ksh4.7 billion ($47 million) during the period, and has issued a warning that its full-year net earnings will fall by at least 25 per cent due to the effects of interest rate caps and increased non-performing loans.

Co-operative Bank of Kenya saw its net profit fall by 9.5 per cent to Ksh9.5 billion ($95 million) from Ksh10.5 billion ($105 million), while Equity Bank’s net profit dropped by three per cent to Ksh14.6 billion ($146 million).


KCB’s overall net profit on the other hand remained flat at around Ksh15.07 billion ($150.7 million).

In the six months to June 30, KCB, Co-operative Bank, Barclays, CfC Stanbic and Housing Finance recorded a fall in profit while Sidian Bank formerly K-Rep Bank, posted a loss of Ksh122.79 million ($1.22 million), from a profit of Ksh158.2 million ($1.58 million) in the same period last year.

Kenya’s economy is in need of a stimulus to jumpstart growth stifled by falling credit to the private sector and increased spending on political activities estimated at Ksh70 billion ($700 million).

The growth for this year is expected to be lower than the 5.8 per cent achieved last year, with the World Bank putting it at 5.5 per cent.

Credit growth

Analysts at Cytonn Investments Ltd expect the country’s economy to grow at between 4.7 per cent and 5.2 per cent and the private sector credit growth to remain below the government’s annual target of 18.3 per cent.

In August, private sector credit growth fell to 1.6 per cent.

“This trend may well adversely impact economic growth,” said the Cyntonn analysts.

According to Britam Asset Managers, private sector credit growth has continued to slow down in the year due to the economic downturn as businesses postponed expansion plans while banks became more reluctant to lend in light of deteriorating asset quality and risk pricing constraints brought on by interest rate caps.

The industry’s gross non-performing loan ratio deteriorated to 10.7 per cent in August from 9.2 per cent at the end of 2016.

According to a report by Standard Investment Bank dated November 16, 2017, most bad loans are being driven by business loans and personal/household loans.

The sectors with the highest amount of bad loans are building and construction, trade and agriculture.

Interest rates are the key source of revenue for the banks. The government introduced caps on interest rates in September last year. Banks are now confined to a uniform lending rate that is pegged at four percentage points above the Central Bank’s benchmark rate, which currently stands at 10 per cent.

The harsh operating environment has affected operations of banks, forcing them to find new sources of revenues.

Non-funded income largely from fees and commissions levied on transactions has not been enough to lift total earnings.

Economists at Citi Group expect Kenya’s inflation for 2017 to average 8.5 per cent, above the government’s upper limit target of 7.5 per cent.

How quickly political tensions dissipate will be key in driving growth in 2018. The country has witnessed riots in opposition strongholds and Nairobi since President Uhuru Kenyatta was declared winner in a repeat presidential election on October 26, and after the Supreme Court upheld his victory recently.

“A pick-up in growth will continue to be constrained by the agricultural and manufacturing sectors, which still have issues coupled with the unresolved matter of the Islamist terrorist group Al Shabaab that has made sustained recovery in the tourism sector complicated,” said Citi’s Africa economist David Cowan.

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