Markets & Finance

Why banks will pay less for deposits

kcb

Customers are served at a KCB branch. The lender has indicated it sees room for reduced cost on deposits owing to the KBRR cut. PHOTO | FILE

Banks are likely to slash some deposit rates to protect net interest margins after a reduction in Kenya Banks Reference Rate (KBRR), analysts say.

Standard Investment Bank (SIB) said KCB Group had indicated in a conference call that it sees room for reduced cost on deposits owing to the rate cut.

This, according to the brief, will see the bank maintain its revenue growth as margins remain steady, with an increase in SME and micro loans.

KBRR, which is adjusted every six months, is calculated as a weighted  average of the Central Rank Rate (CBR) and the two-month weighted moving-average of the 91-day Treasury bill rate.

“On net interest margin pressure owing to recent cut in KBRR, (the bank) management said the lower rate also offers room to cut costs of deposits. This is key for KCB since the bank’s assets and liability profile is weighted more towards low-margin corporate business,” said SIB.

Customers have pushed banks to raise deposit rates while simultaneously lowering lending rates, especially arguing that interest on deposits should be benchmarked against the prevailing Treasury bill rates.

SIB head of research Francis Mwangi said the adjustment of deposit rates is likely to be an industry wide move.

“It would be unlikely for banks to agree to have loans benchmarked against KBRR and deposits on the Treasury bill rate, which means that we would see both benchmarked against the KBRR. What this means is that the overall interest income of banks is unlikely to be affected by the lower KBRR,” said Mr Mwangi.

Genghis capital analyst Silha Rasugu said while the KBRR is primarily a reference for lending rates it impacts how commercial banks price their deposits as they try to maintain high margins.

READ: CBK rate reduction pressures banks to lower cost of loans

He says while interest paid on short-term deposits that consist of the majority of bank deposits is likely to be adjusted downwards, the lenders may combine this move with an offer of higher returns for long-term depositors in order to lock them in.

“Lowering deposit rates will be counter-intuitive as customers (especially retail) will be discouraged from saving leading to withdrawal of deposits that are necessary to fund new loans,” said Mr Rasugu.

“We are likely, therefore, to see increased competition among the banks for long-term retail deposits. The aftermath post-KBRR was quite light last year where we only saw I&M making drastic changes to deposit rates by raising them.”

I&M Bank in September set up a floating deposit rate where it offered to pay up to one percentage point above the KBRR for large sums deposited for more than a year and 0.5 percentage points below KBRR for lower volumes above Sh50,000.

Mr Rasugu argues banks would gain from locking in long-term depositors if the already lower lending rates increase loan uptake, to offset reduced interest margins.