Stable currency eats into banks’ forex earnings

The banking industry registered reduced forex trade income in the first half of this year due to minimal currency fluctuations.

Dealers in major commercial banks, including Bank of Africa, Standard Chartered, Cooperative Bank, Commercial Bank of Africa and others, attributed the reduced performance to a relatively stable forex market.

“When you compare the first halves of 2009 and 2010, what immediately catches your attention is the lack of significant volatility this year compared to last year. The shilling has been on a gradual depreciation mode for most of 2010,” said Citibank CEO Ade Ayeyemi.

Currency dealers said reduced trading activities on fears of global economic uncertainty in the second quarter of the year saw less foreign exchange inflows and lower corporate dollar demand.

“This year’s fluctuations were not sharp enough to warrant higher returns hence bank earnings on forex trading were adversely affected” said Solomon Alubala, a currency dealer with Co-operative Bank of Kenya.

Major commercial banks registered lower incomes while the few that increased their returns employed high capital investments to net above average returns but dealers said the first half of the year was unfavourable.

Kenya Commercial Bank, Commercial Bank of Africa, Family and Consolidated bank recorded a marked decline in their foreign exchange trading incomes for the first half of 2010.

Higher risk

Smaller banks stand a higher risk of loss due to low capital investments.

Even though the year recorded one of the highest drops in the value of the local currency, the decline was gradual, lowering market activities.

The shilling hit its lowest level at Sh82 against the dollar from highs of Sh74, to register a five year low.

Foreign exchange trading has grown to become a very significant part of income generating activities in commercial banks.

In its half year results, Barclays Bank’s income from currency trading was a quarter of total profits generated by the bank, standing at Sh1 billion.

Kenya Commercial Bank saw foreign currency trading half year income drop from above Sh1.2 billion last year to Sh676 million this year.

Industry players said increased expertise by clients on market forces has also increased competition in the field, cutting down the traditional profit margins.

“There has been an increase in the general client knowledge on market forces hence increasing competition in the forex market leading to reduced profit margins,” said Joshua Anene of Commercial Bank of Africa.

“There was a lull in the import-export trade early in the year hence reducing the number of clients buying foreign currency which in turn ate into the profit margins, it is therefore not only a matter of volatility but also an issue of international trade” said Peter Mutuku, a currency dealer with the Bank of Africa.

The world bank report on the economy in the first quarter of the year reported low import-export trade volumes but predicted a surge in international trade later in the year.

Sector players said that the reduction in foreign exchange inflows into the country due to lack of new investments or donor aid into the country arising from the just ended financial crisis has reduced market activities.

Economic fundamentals

“The views of the bank (Citibank) were mostly based on local economic fundamentals and largely positive for the Kenya Shilling but the international forces disrupted the market creating uncertainty hence people kept out of the market, ” adds Mr Ayeyemi.

The recovery in the Euro signals improving health of the eurozone economy which is expected to boost export markets for local producers.

Currency dealers said late 2009 saw reduced foreign direct inflows due to the effects of the global financial crisis hence there were no external shocks to the shillings reducing volatility.

The passage of the new law, and the weak US dollar coupled with a strong Euro demand has seen the local currency rise to recover from its losing streak.