A tale of three top banks coping with a tight credit market

Sunday July 23 2017

CONTRASTING FORTUNES: Co-op and KCB are lending more as Equity goes for government securities. Which will prevail ? PHOTOS FILE | NMG


Kenya’s top three banks are engaged in a fierce competition for numbers, but the winner may eventually be determined by the niche they serve.

According to Moody’s Investor Service, a research division of global rating agency Moody’s, the three banks — KCB, Equity and Co-op Bank — are stable enough to withstand external shocks, but their operations in a hostile environment will determine who will be the most profitable .

“KCB, Equity Bank and Co-op Bank face challenges in the months ahead, with muted loan growth and mounting asset quality pressure.

Despite their business models and areas of vulnerability, we expect all three to maintain healthy profits and strong capital that will continue to provide substantial protection against downside risks and contribute to support their credit quality,” the advisory firm says in an analysis released this past week.

It gave the three banks the same rating on a global scale (B1, bi), which means that the outlook is stable.

However, Moody’s found that Equity would be the most vulnerable in the current market conditions because of its model that has created a niche in the SME segment, which accounts for more than half of its business.


When contacted for comment, Co-op said they  are focused on controlling their operating costs and reducing reliance on high-margin consumer loans and micro credit in favour of the low-margin  high value lending to corporates, Saccos and mortgages to survive the fixed interest rate regime.

“Co-op Bank feels it can substantially compensate for the lost interest income caused by rate caps, by pushing higher loan volumes. Rate caps means banks cannot afford to book non-performing loans while margins can only be protected by lower operating costs,” the bank said in a statement.

READ: Kenyan lenders on the spot for distorting loan numbers

Equity CEO James Mwangi said the lender would maintain its focus on SMEs particularly in the energy, infrastructure and export sectors to enhance its earnings.

“As the Bank enters the next phase of growth, there is a renewed need to mobilise funds to finance major infrastructural developments as well as local and regional SMEs,” said Dr Mwangi.

KCB had not responded to our e-mailed queries by the time of going to press.

“Equity Bank’s focus on lending to small and mid-sized enterprises (SMEs) and micro-finance means it is most exposed. These segments have seen a more acute tightening in the availability of credit, with lending rates historically above the 14 per cent cap.

"These small borrowers, too, are hit hardest by rising inflation so we expect rising delinquencies in these segments. KCB and Co-op Bank’s focus on loans to corporates and low-risk government employees will soften the impact,” the analysts said.


Moody’s data shows that Equity Bank has carved out a niche for itself in SME lending, KCB in corporate lending, and Co-op is evenly spread between corporate (mostly saccos) and consumer lending. GRAPHICS | TEA

However, Equity Bank could weather the storm given its ability to minimise risks and loan balances. Other factors in support of the three banks’ resilience are high profitability, strong capital bases, and broad deposit franchises.

In contrast, small banks are forecast to suffer when business conditions get tough.

The analysts contentiously said Equity Bank is the best positioned for growth because of its access to low cost deposits from branches and international credit lines that give it an edge in liquidity.

Nationally, Moody’s gives Equity Bank a rating of above Co-op Bank’s, which reflects the level of differentiation across the segments. KCB was not rated in this category. 

Competition for business among the three banks has seen them review the terms of loans to boost lending.

Moody’s data shows that Equity Bank has carved out a niche for itself in SME lending, KCB in corporate lending, and Co-op is evenly spread between corporate (mostly saccos) and consumer lending.

Lending to micro enterprises and agriculture, however, still constitutes an insignificant portion of business for the three banks and could be the next frontier of competition.

Mobile-based micro loans enable customers to borrow amounts as low as Ksh100 ($1) for repayment within 30 days. The banks are fighting it out in this segment with products like Eazzy loans (Equity Bank), KCB-M-Pesa loans (KCB) and M-Co-op Cash loans (Co-op Bank).

The three banks are defending their niches while also getting a toehold in their rivals’ turfs. KCB, for instance, has been seeking to penetrate the SME segment through Biashara Club, an incubation programme for startups, and 2jiajiri, which seeks to encourage youth to venture into entrepreneurship.

Co-op Bank has been seeking to protect its business by supporting innovation in the fragmented sacco sector, which it then sells as business solutions to individual societies at a fee. It is also promoting consumer lending among salaried customers.

Protecting margins

To protect their margins, the banks have also reclassified savings accounts so that only contracted deposits can earn interest. Deposit rates are pegged at 70 per cent of the Central Bank Rate (currently at 10 per cent) translating into seven per cent.

Francis Mwangi, head of research at Standard Investment Bank, said it is not economically viable for banks to lend long term at low interest rates, hence the change of tack.

“Normally, the longer the duration of a loan the higher its cost because of risks like inflation. Since banks can’t provide long-term loans above 14 per cent, there is a disincentive to issue them,” said Mr Mwangi.

READ: Credit to private sector to slow down

Government securities
Moody’s said the combined impact of lower lending rates, loan volumes and increased provisioning was to put downward pressure on profitability at all three banks.

This has also forced the banks to put more of their money in government securities which offer risk and tax free returns of about 10 per cent.

“With lending rates now capped at 14 per cent, banks are increasingly turning to high-yielding government securities, reducing private sector lending and amplifying the economic slowdown,” says Moody’s.

Last week, Central Bank retained its policy lending rate at 10 per cent for the fifth consecutive time, to cushion borrowers from high interest rates capped at four percentage points above the prevailing CBR.

READ: Kenya retains key interest rate at 10pc

Between January and March, SME lending comprised 55 per cent of Equity’s loan book while corporate loans made up 44 per cent of KCB’s loan book.

The principal business of Co-op Bank was consumer lending at 38 per cent, followed closely by corporate at 36 per cent. 

According to  Moody’s,the three banks face challenges in the coming months related to subdued growth in loan disbursement and increased portions of bad loans largely due to Kenya’s deteriorating business environment.

The agency said that factors, like severe drought, which has driven up food and fuel prices, and reduced investment spending ahead of the August 8 general election, have put small borrowers under financial stress.

The worsening of loan quality has been more prominent at Equity than at its peers, though the proportion of non-performing loans at the bank remains below both KCB and the overall banking sector.

It is argued that the continued tough conditions facing the SME sector will continue to exert more pressure on Equity’s performance than on its peers.

According to Moody’s, SME and micro lending segments face the highest risk of NPLs in the months ahead.

READ:Non-bank credit options for small borrowers