Commercial banks’ payroll burden rose to a seven-year high in 2016, even as interest rate caps began to erode the industry’s earnings, prompting the lenders to introduce a raft of cost-cutting measures.
Newly released Central Bank of Kenya (CBK) data shows that staff costs rose 9.6 per cent to Sh83.9 billion in the year ended December 2016 or 82.1 per cent of the net earnings, which increased 8.8 per cent to Sh102.2 billion.
This means that each shilling spent on compensating staff yielded Sh1.21 in profit for the period, reversing the maximum efficiency gains of 2014 when banks earned Sh1.35 for each shilling paid to employees.
The number of people employed in the industry continued to fall in 2016 after years of steady increase but the wage bill kept growing as competition for skilled staff continued and unionisable staff salaries rose according to pre-negotiated collective bargaining agreements (CBAs).
The CBK data shows that compounded annual growth rate of staff costs stood at 8.79 per cent in the seven years ended 2016, surpassing an 8.64 per cent expansion in net earnings over the same period.
The average bank employee earned Sh134,484 per month in 2010 but jumped 52.6 per cent to Sh205,315 last year despite the total workforce rising from 28,846 to 34,083, underlining the impact of the payroll growth.
Banks have, however, moved to retrench staff and scale back on brick-and-mortar operations in one of the most aggressive cost-cutting drives seen in the past decade.
In the past 12 months alone, the industry has shed at least 600 jobs, reflecting retrenchments by Sidian Bank, Family Bank and Barclays Bank among others.
Barclays #ticker:BBK and Standard Chartered Bank #ticker:SCBK have announced the closure of 11 branches combined as part of the shift to agency and digital banking that have helped cut costs associated with branch operations.
The number of ATMs deployed countrywide also dropped to 2,656 last year from 2,718 in 2015, signalling the rapid uptake of cheaper and more convenient platforms, including mobile and Internet banking.
“The decrease in the number of ATMs by banks has been driven mainly by adoption of cost-effective channels of offering financial services such as the use of mobile banking platforms,” the CBK says in its latest banking supervision report.
The regulator says heavy investment in technology by the lenders has given them the flexibility to cut costs, especially in the rate caps environment.
“As institutions continued to devise ways of minimising operating costs especially against the backdrop of the recent (interest rate caps) … robust ICT platforms will continue being a perfect enabler for institutions to offer banking services efficiently,” the CBK said.
The interest rate controls have eliminated differentiation in the industry that saw some banks offer loans to riskier borrowers on the calculation that higher interest rates charged on the debt would cover defaults and still leave them with a profit.
With all lenders boxed to lend within the same narrow band, only the most efficient banks are expected to weather the rate caps by combining scale and cheaper delivery channels.
Equity Bank, the country’s largest retail bank, says 90 per cent of all transactions now occur at agents or on digital platforms in what has seen it close more than 10 ATM lobbies.
StanChart is targeting migrating over 80 per cent of its transactions by 2018 to its digital platforms that include video and Internet banking.
The banking industry, which recorded a rare net profit drop of Sh6.5 billion in 2015, is on course to post a larger earnings fall this year as it begins to feel the full impact of the rate caps.
KCB #ticker:KCB, Equity #ticker:EQTY, Co-op #ticker:COOP, StanChart and Barclays — which account for more 60 per cent of the sector’s earnings — have recorded flat or lower profits in the half year ended June when some smaller players sunk into losses.
The lenders are expected to intensify their efficiency drive, having had to contend with the effect of bloated staff in the past, including 2006 when each shilling paid to workers returned net earnings of 93 cents.