Kenya banks get boost from returns on loans, advances, despite slow growth

Kenyan banks posted a better-than-expected performance helped by flourishing transaction-based income and growing returns on loans and advances as private investors replenished their loan stocks.

In the first two quarters of 2014, the economy grew by 4.4 per cent and 5.8 per cent, respectively, compared with growth of 6.4 per cent and 7.2 per cent in the first two quarters of 2013, according to the Central Bank of Kenya (CBK).

Growth in the first and second quarters of 2014 was supported by improved performance in manufacturing and construction. Agriculture recorded a 5.9 per cent growth in output in the first quarter and 5.5 per cent in the second compared with a 5.1 per cent increase in the first quarter of 2013 and a 6 per cent increase in the second quarter of 2013.

Unfavourable weather conditions in the first half of 2014, however, resulted in increased prices for food items such as maize and beans even as most indicators of performance in agriculture in the year to August pointed to slowed growth.

The private sector continued to dominate bank lending, accounting for 79.3 per cent of total lending in September 2014 compared with the 18.5 per cent share of the government.

The lenders appear to be on track towards delivering super profits, having declared double-digit growth in the first nine months (January-September.)

The global economic slow down and falling commodity prices are likely to have a knock-on effect on the local banking industry. The World Bank, however, expects Kenya’s economy to grow by 4.7 per cent in 2014 and by 5 per cent in the next two years if the country maintains macroeconomic stability.

Diarietou Gaye, World Bank country director for Kenya, said the country’s economy remains fairly resilient, and increasing investments in infrastructure and human capital will strengthen prospects for higher growth and regional competitiveness.

Key challenges, however, she said, include drought, insecurity, fiscal expansion and implementation of the devolution process.

While it is the largest and most diversified economy in East Africa, Kenya’s average growth rate of 4.6 per cent in the past decade has been low relative to its peers in the region and throughout Africa, according to the World Bank

“The low growth rate has limited the country’s ability to significantly reduce poverty and inequality, reflected in wide disparities in opportunities and outcomes between regions, gender and the growing youth population,” says the Bank.

According to the Central Bank, the Kenyan banking sector registered improved growth in assets in the year to September driven by growth in deposits, injection of capital and retention of profits. Deposits from customers, which form the major source of funding for the banking sector, accounted for 73.1 per cent of total funding liabilities.

The global price of crude oil has dropped to $60 a barrel for the first time in five years as producers failed to control the excess supply.

Crude oil has dipped about 45 per cent this year as the Organisation of Petroleum Exporting Countries (Opec) which commands 40 per cent of the world’s supply sought to protect its market share amid a US shale oil boom that is aggravating the global glut.

“The banks’ performance this year has largely been driven by increased loan books and improved operational efficiency through the use of information technology. Interest rate margins have also remained fairly stable,” said Johnson Nderi, corporate finance manager at ABC Capital.

Tough times ahead

“However, 2015 is going to be a challenging year for the economy due to the global economic slowdown in China, Japan, and the Eurozone. ”

“Over the medium term, most banks expect credit growth to be driven by SMEs, the real estate sector and improved credit uptake in regional markets, said Francis Mwangi,” head of research at Standard Investment bank.

An analysis of the banks’ share price performance showed that at September 30 Barclays Bank underperformed by 0.9 per cent while Equity Bank had gained the most (67.5 per cent).

KCB was the most traded banking shares, having moved stock worth $250.4 million compared with $250.16 million for the full year 2013. It also registered the highest foreign net inflows in the sector ($88.5 million).

Following the International Finance Corporation’s sale of its holdings, Diamond Trust Bank registered the highest net outflows ($9.7 million), while Equity Bank attracted the highest foreign investor participation, (61.4 per cent) during the same period.

“We have revised sector loan and deposit growth forecasts to 18.6 per cent and 16 per cent from 19.8 per cent and 19.4 per cent respectively. We retain our hold [stock that is not traded] recommendation for the sector,” said Mr Mwangi.

The Kenyan banking sector recorded a 13 per cent growth in pre-tax profit, rising to $1.16 billion in September from $1.02 billion from September 2013 as total income surged 13.9 per cent to the $3.36 billion from $8.86 billion.

Interest on loans and advances, fees and commissions and government securities were the main sources of income, accounting for 59.2 per cent, 18.7 per cent and 15.1 per cent of total income, respectively. Total expenses increased 14.4 per cent to $2.2 billion from $1.92 billion. Interest on deposits, staff costs and other expenses were the key components of expenses, accounting for 32.7 per cent, 28.2 per cent and 24.1 per cent, respectively.

The banks’ return on equity increased to 32.1 per cent from 30 per cent over the same period. “I don’t think 2015 will be pretty for banks,” said Mr Nderiadding, “To a certain extent Kenyan banks are not exposed to the global economic conditions but if businesses require financing from international lenders, then we can be affected.”

According to John Kirimi, executive director at Sterling Capital, the declining world prices of crude oil could force commercial banks to review their financial plans and affect their earnings.

“Upto this point in time, oil prices have been going down and the future seems to be extremely bright, but now there are jitters because nobody knows how far down the oil prices will go,” said Mr Kirimi.

Travel advisories

“Many organisations will have to review their plans and this will affect banks. Oil is a new line of export in Kenya and was expected to be a game changer for the country’s economy. This provides huge opportunities for banks but with the prices falling, it means banks have to review their financial projections.”

According to Mr Kirimi the poor performance of the tourism sector and some agricultural produce such as tea will have an impact on commercial banks’ profitability.

“The wellbeing of the economy will affect bank operations. The fight over interest rates and the fact that many of the banks have been preoccupied with raising funds to meet the Central Bank’s new capital requirements, all have an effect on the performance of banks when they are taken into account,” he said.

“Most of the banks have raised additional funds for more investable income. As long as other sectors of the economy are growing and credit to the private sector flowing then that is a positive side to the future.”

Among selected crops, growth in production of tea, coffee and horticulture slowed. Production of milk declined during the year to August 2014 as production of sugarcane improved.

The number of tourist arrivals declined by 14.9 per cent in the year to July 2014 compared with a decline of 9.3 per cent in the year to July 2013. The unfavourable performance is attributed to adverse travel advisories from source countries regarding insecurity in Kenya.

Most tourists came into the region through Jomo Kenyatta International Airport Nairobi (83.1 per cent share), and the Moi International Airport, Mombasa (16.9 per cent share).