Huge bank profits spark fresh effort to curb cost of loans in Kenya

Kenyan banks rode the high interest rates wave to grow their incomes by wide margins - renewing the parliamentarians’ quest to curb the cost of borrowing through legislation.

Also read: Banks’ queries on loan defaulters hit 1.8m

In the past couple of weeks that companies have been releasing their half-year results, many Kenyans have watched with consternation as banks announced double-digit growth in earnings for the period when their customers felt the greatest pain of borrowing and severe economic hardship.

The first six months of 2012 have been characterised by high level interest rates averaging 24 per cent and a headline inflation rate of about 16 per cent, deeply eroding the purchasing power of many households.

These realities were partly behind the MPs’ aggressive attempt early this year to legislate on interest rates – a move that stalled the passing by Parliament of the crucial Finance Bill for months.

The MPs, led by joint government Chief Whip Jakoyo Midiwo, accuse banks of excessive greed, arguing that the high interest rates are a big burden to ordinary citizens and are destroying many livelihoods across the country.

But the banks have responded with a range of answers, including the very complex one of risk assessment and computation into the cost of lending, besides warning that legislating on the cost of loans would confine borrowing to the small clique of individuals with assets to secure their debt.

As the banks announced their half- year results in the past two weeks, the one number that many ordinary Kenyans looked for was their interest income – the money earned from lending activities in the period under review.

The banks did not disappoint.

The numbers show that in the first six months of the year, the lenders grew their profit before tax by 30.9 per cent to Sh53.2 billion compared to Sh40.8 billion in a similar period last year.

Even more critical to the interest rates debate is the fact that for most banks, interest income was a key driver of profits growth – a clear demonstration that the lenders benefited immensely from the large margins arising from high interest rates.

Central Bank of Kenya (CBK) data shows that six banks, categorised as large banks, were the major beneficiaries of the high interest rate regime.
The six – Equity Bank, KCB, Barclays, Standard Chartered, Co-operative and CFC Stanbic – enjoyed net interest margins of over 15 per cent in the first six months of the year.

Net revenues for the big six were four percentage points higher than the total for the remaining 37 lenders.

“The higher interest rate environment has boosted margins for both KCB and Equity, given the low cost of funding,” said Renaissance Capital in a research note on the two banks. “Savings deposits account for more than 70 per cent of total deposits for both banks.”

In ordinary language, the researchers are saying that the banks took deposits at almost no cost but high interest on borrowers of the same funds raking in billions of shillings in interest income.

Equity Bank led the pack with a 94 per cent increase in interest income, followed by Co-op Bank with 84 per cent, Standard Chartered Bank (81 per cent), KCB (74 per cent) and Barclays at 17 per cent. The pattern was similar for other banks.

This happened even as the lenders reported only marginal growth in loan books as borrowers stayed away from taking new loans in the wake of a huge increase in interest rates.

“Performance was mainly driven by net interest margin expansion on the back of higher lending rates and increased allocation of assets to lending,” Standard Investment Bank said of StanChart’s performance.

“Earnings performance came in above expectation and was mainly driven by improved net interest margin,” the research note said, adding that the higher net interest margin in second quarter of 2012, was the result of a 0.75 per cent drop in weighted average interest rate on deposits on a quarter on quarter basis.

This drop in deposit rates has made interest margins – the difference between the rate at which banks are lending money and what they pay for the deposit – the latest target of the parliamentarians who are pushing for interest rate controls.

“We have previously tried to cap the lending rates, but this time we are looking at interest payable on savings with a view to fixing it as a fraction of interest paid on borrowings so that we can deal with the spread,” said Rangwe MP Martin Ogindo.

The MPs’ plan is to move an amendment to the Finance Bill that would leave the banks with a five to six per cent margin between lending and deposit rates.

Mr Midiwo, who is also the Gem MP, has also promised to introduce an amendment to the Finance Bill, seeking to regulate interest charged by all banks with government ownership to increase their influence in the market.

The method has been used with little success in the petroleum industry where government-owned National Oil has failed to become the pace-setter it was meant to be.

“We must encourage Kenyans to save and this can only happen with a reduction in the spread,” said former MP Joe Donde, famed for introducing the first Bill that sought to regulate lending rates in 2000.

The Kenya Bankers Association (KBA), however, dismissed claims of excessive profiteering from high interest rates.

Habil Olaka, the chief executive of the bankers’ lobby, said the sector is being demonised by those looking at the absolute figures without considering the large amount of capital investors have put in the businesses to get the results.

“I don’t see anything outrageous with these results as other companies have announced similar profit growth in the period,” said Mr Olaka.

Kenya’s top five lenders posted double digit net profit growth led by KCB at Sh6.08 billion, Equity’s Sh5.4 billion, Standard Chartered Sh4.53 billion, Barclays Sh4.26 billion and Co-operative Bank Sh4.02 billion.

Returns from short term government securities also helped improve the banks’ per performance. Banks have before argued that customer deposits are not their only source of funds – pointing to the fact that they often have to use expensive sources such as borrowing from other banks.

Borrowing from other banks, expected to be a major cost centre, with the high cost of lending among banks, however did not dent the banks’ performance.
Mr Olaka said the high lending rates were the product of a steep rise in cost of funds that risked wiping out the net margin banks had in the first half if not revised. “This could also be due to timing difference between when the rise in lending and deposit rates impact on the books; creating a mismatch that will iron out in the next reporting period,” said Mr Olaka.

Though the cost of deposits grew in folds, previous rates were much lower keeping the ultimate cost at a modest level. The banks have also argued that while adjusting the lending rates, over and above the rise in cost of funds, they have had to factor in the risk of defaults during the harsh macro-economic environment by adding a premium.

This argument is, however, weakened by the fact that there has not been growth in non-performing loans with most banks actually improving the quality of their loan books.

Some analysts now believe banks will be forced to quickly adjust their lending rates downwards to counter the resurgence of the lending rates regulation debate in Parliament. Earlier in the year, the bankers had made a number of concessions to the Treasury and the Central Bank to ward-off the previous attempts to regulate interest rates.

None of the measures have so far been implemented.

The list of concessions included a promise by the banks to make full disclosures on the total cost of a loan and allowing good borrowers to bargain for better rates based on their character.

“Historically, Kenyan banks have not reacted as rapidly to interest rate declines but given the focus on “excessive rates” and calls for interest rate caps, they are expected to prudently pass on the benefits of lower rates,” said Renaissance Capital.
gngigi@ke.nationmedia.com