Big banks reward depositors with higher interest rates

Kenya’s biggest banks are rewarding their depositors with higher interest rates, aiming to ward off competition from smaller rivals and stay ahead in the profits race, latest industry data shows.

The amount of money that the large lenders paid their depositors in interest rose 23.2 per cent in the nine months to September compared to a 16.5 per cent increase savings deposits for the same period.

Commercial banks paid Sh20.2 billion for the Sh1.1 trillion held in deposits compared to the Sh16.4 billion they paid out for the Sh953 billion held in a similar period last year.

The big banks are reacting to the small lenders’ aggressive fund raising activities backed by higher deposit rates.

“They are now competing for the deposits and that is more on the basis of price. Initially, there was an argument that banks were not competing on price, but that has now become a big factor,” said Habil Olaka, the chief executive of Kenya Bankers Association (KBA).

The Central Bank of Kenya (CBK) data shows that interest paid to depositors by the big banks rose to 3.94 per cent in September up from 2.94 per cent in September last year.

The share of deposits controlled by the five large banks - KCB, Equity, Standard Chartered, Co-operative Bank and Barclays – has been declining as the smaller rivals up their game.

READ: Competition narrows big banks’ interest spread

The large lenders now control 43.2 per cent of the industry’s total deposits down from 44.2 per cent in September last year and 47 per cent in 2012.

Increased flow of deposits to smaller lenders shows a growing confidence in Kenya’s banking system which has previously been viewed as fragile, forcing depositors to charge premium prices for their money.

“The small banks are able to attract deposits but they are paying lower rates than they have been paying before widening their profit margins,” said the head of research at Standard Investment Bank, Francis Mwangi.

The CBK data shows that small banks are paying depositors at an average rate of 7.44 per cent compared to 7.59 per cent paid a year ago.

Large banks’ aggressiveness is also linked to rising pressure to reduce the deposit to loan ratio, which has been rising leaving them with little headroom to issue more debt. The ratio stands at a high of 78 per cent for the industry.

Banks are also under pressure to book long-term deposits in line with their booking of long tenure loans to avoid a liquidity mismatch.

Vimal Parmar, the head of research at Burbidge Capital, attributed the higher deposit rates to banks struggling to meet higher capital adequacy ratios that are due to come into effect in January.

“If they don’t have capital to lend they have to get deposits so that they can lend,” said Mr Parmar.

Large banks control of the loan book has also dropped to 44.1 per cent from 46.8 per cent in September last year, underlining growing competition in the sector.

Luckily for the big banks, their proportion of the industry’s profits has, however, remained intact at 57 per cent – an outcome that is attributed to higher interest spreads they have continued to enjoy.

The five top banks reported a Sh60 billion profit before tax in the nine months ending September 31, compared to the industry’s total of Sh104 billion.

“The big banks have a diversified their loan books allowing them to charge higher lending rates,” said Mr Mwangi.

Ranking of the banks in terms of profitability remained the same with KCB leading the pack followed by Equity, Stanchart, Co-operative and Barclays. The five have dominated the 43-member industry for the past 10 years.