Kenya banks look to another year of super profits

Commercial banks are on course to ride high lending rates to another year of record profits, despite persistent calls to lower them to reflect the real cost of money.

The banks have earned Sh92 billion in profits before tax in the eight months to August this year, helped mainly by interest income from loans.

The latest data from the Central Bank of Kenya (CBK) shows bank profits grew by Sh11.4 billion (12 per cent) compared to a similar period last year. They seem set to beat last year's full year earnings of Sh120 billion.

Lending rates remained unchanged, despite the introduction of a new pricing formula in July that was expected to reduce their margins and make loans cheaper.

The regulator’s data also shows that non-performing loans — those left unpaid for more than six months — declined for the first time in three years.

Bad loans dropped marginally to Sh100 billion from Sh101.7 billion in June following release of delayed payments to contractors by the Treasury.

Banks also reported slightly higher lending, with their collective loan book growing to Sh1.84 trillion from Sh1.78 trillion in June.

“The momentum in growth of loans is still there and it is coming at a lesser cost,” said Francis Mwangi, the head of research at Standard Investment Bank.

“This means we may be seeing accelerated lending in the coming periods as banks drop their conservative lending policy.”

Mr Mwangi said he did not expect the banks’ profits to be hurt by the introduction of the KBRR, the root of the central bank’s pricing formula, because they had protected their profits in the medium term through the premium they were allowed to load on the standard base rate.

The KBRR was introduced alongside a requirement to disclose the total cost of loans in an Annual Percentage Rate (APR) that would make comparing loans easier and pressure more expensive banks to reduce their premiums.

“We have not seen an outright war for market share, so we don’t see (the formula) exerting pressure on margins in the medium term,” said Mr Mwangi.

READ: Why new CBK tool may not deliver cheaper loans soon

Lending rates are still at an average of 15 per cent, as reported by the lenders, despite the introduction of the KBRR formula. They stood at 14.55 per cent in June and 16.91 per cent in July.

The interest spread — the difference between lending rates charged by large banks and what they are paying depositors — is also growing.

Data from the central bank shows that the spread increased to 11.3 per cent in July when the KBRR was introduced, up from 11 per cent in June. Six banks classified as ‘large lenders’ control more than half of the Kenyan market.

The government has been pushing for lower interest rates in efforts to spur growth of the private sector. This led the central bank to introduce a new pricing system expected to ensure transparency by having all lenders use the standardised base rate, the KBRR.

Individual banks then load a premium on the rate, which they are to disclose, depending on their operational efficiency.

The CBK set the first standard base rate at 9.13 per cent, based on its benchmark rate and the weighted two-month moving average rate of the 91-day Treasury bill.

Commercial banks have loaded an average premium of three per cent for commercial mortgage loans and four per cent for commercial loans.

The sector regulator says it will publish details of the premiums loaded by different commercial banks so as to make the sector more competitive.
“Publication of the premium (K) values in the mass media will be done after completion of data clean-up exercise,” said the CBK.

The premium marks the profit appetite of banks as well as the costs incurred, such as operational and interest expenses. Banks have been able to cut their deposit costs by reducing rates paid to corporate depositors in line with a drop in returns on government securities. Banks are currently holding Sh2.21 trillion in savings up from Sh2.15 trillion in June.

Last week the CBK retained its indicative rate, CBR, at 8.5 per cent in spite of rising inflation. Analysts attributed this to support for the government policy of pushing down interest rates.

Interest paid on the three-month government debt dropped from 11.4 per cent in June to the current 8.4 per cent. Banks, however, are not expected to respond with lower rates.

Mr Mwangi said this is due to the volatility of the cost of funds as reflected in the interbank rate, which has been fluctuating owing to tight liquidity in the market. Rates will be kept up to maintain profitability.

Bank shareholders are unlikely to take higher dividends home though, as most lenders are expected to retain more profits to boost their capital levels.

The CBK requires commercial banks to hold a capital buffer to help them absorb any economic shocks that may come their way.

Despite the expectation of lower profit-sharing and plans to raise additional capital from shareholders, investors have continued to flock to banking counters at the Nairobi Securities Exchange. Three of the listed lenders — Standard Chartered, KCB and Equity — are currently trading at one-year highs.

Johnson Nderi of ABC Capital said Kenya’s banking sector was expected to continue growing because the economic targets spelt out by the central bank are pegged on increased lending to private sector.

“Kenya’s banking sector is structured in such a way that growth is built in the system,” said Mr Nderi.

The CBK had expected banks to have loaned out Sh1.87 trillion by end of the year, but they have surpassed that target. This development has not alarmed the regulator, which argues that the credit growth is not inflationary and it is going to productive sectors of the economy.