Large banks’ cost of loans rises above small lenders rates

Large commercial banks are charging borrowers up to five percentage points higher interest on loans than small banks, indicating a wide gap in credit risk perceptions between the two tiers of lenders.

A survey by the banking sector regulator shows the November interest rates spread — difference between returns that banks pay to savers and the interest cost on loans — was 15.83 per cent for Kenya’s six large banks and 10.9 per cent for the 22 lenders classified as small.
Large banks raised lending rates by larger margins than the small lenders in the last four months of last year, even though they continued to enjoy cheaper sources of funds from their huge customer deposit base.

“Interest rate spreads increased between October and November 2011 on account of large banks. Large banks, with lower deposit rates, maintained higher spreads,” commented the Monetary Policy Committee (MPC) in the survey that was done prior to its first meeting of the year last week.

Mid-sized banks — which are 15 as per the CBK classification— had an interest spread of 12.96 per cent.

Central Bank defines large banks as the lenders with a market share of five per cent and above; medium banks control between one and five per cent of the market while small banks have less than one per cent of the market share.

Large banks — which include Equity, KCB, Barclays, StanChart, Co-op and CfC Stanbic — were paying an average of 2.99 per cent for deposits while lending at 18.82 per cent. Middle tier banks which include NBK, NIC, CBA and DTB, were lending at 19.37 per cent and paying returns of 6.41 per cent to their savers. Small banks lent out loans at 17.57 per cent while they were paid savers an average 6.6 per cent.

“Small banks are less competitive in booking cheap deposits unlike the large ones which have the capacity given their branch network and alternative channels,” said Francis Mwangi, an analyst with Standard Investment Bank.

The small and mid-tier banks are usually preferred by corporate clients who need more attention but the large banks are able to play across retail and corporate sectors.

The large interest spreads give big banks room to meet their expenses and book profit margins. According to the CBK survey, key determinants of the spread to banks include the cost of mobilising funds, administrative costs, credit risk, the Treasury bill rate, competition and the Central Bank Rate (CBR).

As the large banks — with the exception of StanChart — were announcing double-digit growth in profit for the first three quarters of last year, most of the small-tier banks were battling with declining profits, underlining the widening gap between the fortunes of the two tiers.

Of the Sh65.3 billion profits before tax reported by the banking industry in the nine months to September, 58.6 per cent was attributable to the big six, indicating the skewedness in the industry earnings. “Apart from the wider spreads, large banks are able to earn more fees because of higher volumes,” said Mr Mwangi.

The recent rise in the cost of living has also negatively impacted on the small banks more as the large ones took advantage of economies of scale while at the same time benefiting from initiatives by the Central Bank to minimise credit risk such as introduction of credit referencing.

“The role of credit risk has waned in large banks while the significance of inflation has increased among small banks,” said the regulator.

The data also shows a widening in the industry interest rate spread to 12.73 per cent from 10.38 in October.
The MPC data could give impetus to the members of Parliament efforts to cap lending rates to four percentage points above the CBR and set the deposit rates at a minimum of 70 per cent of the CBR.

gngigi@ke.nationmedia.com