Markets & Finance

Banks expected to shrug off CBR rise in full-year profit

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An Equity Bank branch in Nairobi. A survey has ranked the bank top in terms of potential returns to investors. PHOTO | FILE

Banks do not expect their profit margins to be affected in the second half after the monetary authority raised the Central Bank Rate (CBR) to 11.5 per cent, a survey by investment management firm Cytonn shows.

Cytonn surveyed the 11 listed banks noting that the extra cost of money associated with a rise in the base rate is likely to be passed on to customers, as was the case in 2011.

The Monetary Policy Committee of the central bank raised CBR to 11.5 per cent from 8.5 per cent over a two-month period—June and July— with the Kenya Banks Reference Rate increasing by 133 basis points to 9.87 per cent in the mid-year review.

“There are concerns as to whether banks will be able to maintain their profitability margins with the increase of the CBR. With the exception of minimal increases in non-performing loans, we do not think the banking businesses will be impacted significantly by the increases as, historically, Kenyan banks have been fairly good at protecting their margins regardless of the rate environment,” said Cytonn investment manager Maurice Oduor.

“The banks contend that only a further hike in CBR, of about 300 basis points, would affect the quality of their loan book.”

According to the analysis, another rise in CBR to the level that would worry banks is unlikely, given that CBK is primarily concerned with managing inflation, which between June and August declined from 7.03 per cent to 5.84 per cent, near CBK’s preferred range of five percent plus or minus 250 basis points.

In the first half of the year, the non-performing loans ratio to total loans for the banking industry stood at 5.7 per cent, compared to 5.6 per cent at the end of last year.

READ: Banks defy CBK, load profit margins on cost of loans

According to Cytonn, banks have shown a willingness to extend the payment period for customer loans as interest rates go up in order to minimise the number of defaulters, effectively allowing a customer to retain the same level of monthly repayment amount by paying for more months.

In the survey, Diamond Trust Bank was ranked the listed lender with the healthiest loan book with non-performing loans at 1.43 per cent of its total loan book.

DTB came in ahead of I&M bank whose ratio was two per cent, while National Bank of Kenya was ranked 11th with an NPL ratio of 9.5 per cent.

“NBK, despite being associated with the government…have the lowest quality of assets in their loan portfolio, as can be seen by their NPLs which are 9.5 per cent of their total loan book,” said Mr Oduor.

Barclays was the listed lender with the highest net interest margins, attributable to more expensive loans and also being able to avoid expensive local money through its funding by the parent company Barclays Plc.

Overall, Equity Bank was ranked top in terms of potential returns to investors, based on high return on capital, efficiency and revenue diversification.

Cytonn cited its planned acquisition of Congolese lender ProCredit Bank and the roll out of Equitel as potential drivers of future value.

Standard Chartered was ranked second overall, also on high in return on capital and deposit mobilisation despite being weighed down by low revenue diversification.