Kenya banks set for another year of record profits

Commercial banks braved the many challenges in the economy to close the month of November ahead of the full-year profits in 2013 — giving the clearest signal yet that they are on course to setting a new profits record this year.

The Central Bank of Kenya’s (CBK) latest report indicates that the lenders posted a Sh126.6 billion profit in the 11 months to November 30, compared to the Sh125.8 billion full-year pre-tax profit last year.

Analysts attributed the robust profit growth to the high interest margins that banks continue to enjoy while cutting on operating costs.

“Most banks have taken bold steps to bring down their cost to income ratios at a time when the interest margins haven’t changed much,” said Vimal Parmar who heads research at Burbidge Capital.

Official statistics also show a marked increase in lending between September and November, when the banks dished out Sh38 billion in loans to their customers and expanded the total loan book to Sh1.95 trillion.

Deposits rose at a slower pace with the savers having left additional Sh29 billion with the banks increasing total savings to Sh2.28 trillion.

Mr Parmar said the increased lending signalled rising optimism of Kenya’s growth prospects among investors.

The lenders’ performance cements the financial services sector’s position as not only the most profitable but also the most durable, having weathered Kenya’s security challenges and its impact on the key tourism sector.

READ: Kenyan banks make Sh71bn profits in 6 months

Analysts, however, do not expect the profits growth to result in higher dividend payouts due to the impending higher capital requirements for banks.

“You have to look at the return on investment (ROI). This increased profitability is on increased assets so if the ROI has dipped you don’t expect higher dividends,” said Johnson Nderi, the corporate finance and advisory manager at ABC Capital.

Beginning January, owners of banks are expected to pump in more of their own money into the businesses to enable the lenders take in more deposits and to lend more under regulatory requirements commonly known as capital ratios.

Some of the lenders such as DTB, NIC and CBA have raised additional capital through rights issues while others like Co-operative Bank plan to retain more of the profits to boost their capitalisation.

Analysts have also pointed out that Kenyan banks have been structured to grow especially after the monetary policy committee set a target for their lending to the private sector. Lending to the private sector is officially expected to grow at 25 per cent this year.

The sterling profits record has, however, not shielded the lenders from criticism for pricing credit too high resulting in a situation where their success is only at the expense of other segments of the economy that have to pay a high price for capital.

The government has recently introduced a standard base rate, referred to as Kenya Banks’ Reference Rate (KBRR), to increase competition among the lenders and ultimately bring down the interest rates.

READ: Banks tap thirst for big loans to grow their profits

Banks have, however, been slow in responding to the new rate. Most have retained interest rates at previous levels and classified the difference between the rate and the KBRR as an operating premium.

Banks are free to load an operating premium on the standard base rate — a figure that the regulators hope should be each lender’s mark of distinction.

The KBRR is fixed at 9.13 per cent until January when it is due for a review. High interest rates have been blamed for the rising level of loan defaults that hit the Sh108 billion mark compared to Sh103.7 billion in September.

A loan is classified as non-performing if it is not serviced for a period of three months. Previously banks had attributed the defaults to government failure to pay contractors.

But the Treasury has used proceeds of the sovereign bond to clear a large proportion of contractor debts.

To reduce their operating costs, banks have been retiring expensive deposits and cutting down staff numbers. The list of lenders who have reduced staff numbers includes Co-operative Bank, KCB, National Bank and Barclays.

The CBK data, however, shows that banks such as CBA, Consolidated Bank, Co-operative and Citi Bank, are not riding the profits train having recorded a decline in the nine months to September. 

In the six months between April and October this year, the interest spread enjoyed by banks dropped marginally to 9.4 per cent from 10.2 per cent — a level that remains too high compared to global standards.

The high margins are said to be part of the reason bank stocks are popular with foreign investors at the Nairobi Securities Exchange (NSE)
Average lending interest rates stood at 16 per cent in October while the deposit rate stayed at an average of 6.6 per cent.

The deposit rate is, however, for fixed deposits, leaving most savings and current accounts savers with rock bottom rates of below two per cent.

The central bank has said that it is persuading the lenders to review their pricing of debt even as it puts in place structures to reduce operating expenses.

The CBK has introduced agency banking, which allows the lenders to contract third parties to undertake limited transactions such as cash withdrawals, deposits and balance checks on their behalf.

Besides, mobile banking has helped reduce the lenders operating expenses leaving some latitude to bring down costs.

Mr Parmar expects the banks to concentrate on growing transaction incomes next year as they face increased pressure on interest rates.