Banks squeeze depositors in race for super profits

Kenyan banks have further widened their margins following slower increase in deposit rates compared to their lending levels, Central Bank of Kenya data shows.

The banks’ interest spread-—the difference between average lending and average deposit rates—stood at 13.05 per cent in December compared to 12.73 per cent in November and 10.23 per cent in June.

Banks have increased their lending rates by an average of six per cent since June on what they attributed to expensive deposits and tightening of monetary policy.

The current interest spreads were last witnessed in the mid-1990s and analysts say they have created new headroom that will power the commercial banks’ profits.

“Most of them have returned very good results, mainly on the back of higher interest spreads, because deposit rates have increased at a lower proposition compared to the lending rates,” said Francis Mwangi, an analyst at African Alliance.

Banks have made Sh80 billion pre-tax profits in the 11 months to November, according to the CBK, reflecting a growth of 21.2 per cent in the same period last year.

CBK did not provide the growth in the lenders loan book, but analysts reckon that the bankers benefited from the higher spreads and increased lending.

The widening spread is set to stoke fresh pressure on the need to control Kenya’s borrowing and savings charges. This has seen Members of Parliament bid to pass a law that will regulate lending rates and fix the minimum deposit rate at 70 per cent of the CBR — the rate at which the Central Bank lends to commercial banks.

This could place deposit rates at 12.6 per cent based on the current CBR of 18 per cent if the Bill sponsored by Rangwe MP Martin Ogindo becomes law.

The widening spread look set to lessen the impact of the reduced lending on bankers profit in 2010 as it emerged that lending seemed to have flattened from September on expensive credit and CBK says credits growth declined in November.

But analysts, led by Renaissance Capital, say bank profits would slow down this year following reduced lending, which the investment firm expects the loan growth to slow to 10 per cent, down from the expected annualised growth of 50 per cent last year.

“Last year was not a difficult one operationally for the banks, but we believe the reality of tighter monetary policy and rising NPLs will change that picture in 2012,” say Renaissance Capital in a research note to its clients.Investors have taken note due to reduced interest on bank shares at the NSE that has seen some lenders like the National Bank, NIC Bank, Housing Finance and Diamond Trust shed 53 per cent, 48 per cent, 49 per cent and 40 per cent respectively over the past year.On average lending rates have increased to 20.04 per cent in December from 13.91 per cent in June while deposit charges have increased to 6.99 per cent from 3.68 per cent over the same period.

This shows that banks have increased their lending by 6.13 percentages compared to the rise on deposit rates that went up by 3.31 percentage points.

Rates on wholesale deposit, however, have increased to about 15 per cent from six per cent early in the year, bankers led by KCB chief executive Martin Oduor--Otieno say—a pointer that larger depositors are benefiting compared to small savers.

The high deposit rate regime is set to benefit high-net worth investors especially pension fund managers who have suffered from the volatile fixed income market and the bearish Nairobi bourse.