Markets & Finance

Kenyan banks beat their EA peers in returns to shareholders

BANK

Kenyan banks have been able to outdo their regional peers by riding on higher operating efficiencies. PHOTO | FILE

Kenya bank owners enjoy the highest returns compared to their East African peers, helped by lower operating costs and wider interest margins.

Reports on financial sector stability published by National Bank of Rwanda and Bank of Uganda show Kenyan lenders average payback to shareholders as measured by the return on equity was (ROE) ratio was 28.3 per cent as at June, compared to Uganda’s 24.6 per cent and nearly double Tanzania’s 15.1 per cent.

Rwandan banks returned 13.1 per cent to their owners while Burundi was the lowest at 8.1 per cent.

“This is driven mainly by the aggressive lending culture of Kenyan banks and their margins are also wide,” said head of research at Burbidge Capital Vimal Parmar.

The results however marked a decline in returns offered by local banks as other markets improved allowing them to shrink the gap.

Burundian banks posted the largest improvement from 1.1 per cent return in June last year to this year’s 8.1 while Ugandan lenders doubled their ROE from 12.8 per cent in a similar period.

Ugandan banks posted better returns on assets of 3.8 per cent than their Kenyan peers’ 3.3 per cent.

“It shows Kenyan banks employ tier two capital, and debt, to fund their aggressive lending which is not the case in Uganda,” said Mr Vimal.

Kenyan banks have borrowed heavily from development partners for which they incur interest costs, with only the net margin marked as a return to investors.

READ: Kenya, Ghana banks top equity earnings in Moody’s study

The borrowing helps the banks to avoid taking on highly priced deposits while also providing them with long-term funds to lend.

Kenyan banks have been quick to expand to Uganda which offers the second highest returns in the region to support their local units. Nine Kenyan lenders have operations in Uganda compared to seven in Tanzania and four in Rwanda.

Rwanda is however posting faster growth in returns, allowing it to catch up with Tanzania.

South Sudan, which has proved the most productive hunting ground for Kenyan banks was not included in the reports due to lack of data.

It has been the most profitable regional unit for both KCB and Equity Bank despite hosting the youngest operations.

Uganda’s performance is bolstered by a good loan repayment culture which has helped it post the lowest proportion of bad book, four per cent, compared to Kenya’s 5.7 per cent. Burundi has the weakest loan book with 13.3 per cent of loans classified as non-performing.

Kenyan banks have been able to outdo their regional peers by riding on higher operating efficiencies. Ugandan banks use an average of 68.7 per cent of their income to meet operational costs compared to Kenya’s 51 per cent which allows Kenyan lenders to record higher returns.

Rwanda’s cost-to-income ratio is 78.6 per cent. Kenya’s banking industry has relied on technological investments and new initiatives such as the introduction of agency banking, regional cash centres and the cheque truncation system to cut costs.

Tanzania and Rwanda have embraced the use of agents to offer limited banking services.