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High rates fatten bank profits, hit manufacturers

KBL managing director Joe Muganda (left) and EABL Group MD Devlin Hainsworth address the media in Nairobi after the company announced its half- year results for the period ended December  31, 2012 on February 15, 2013. Photo/Salaton Njau
KBL managing director Joe Muganda (left) and EABL Group MD Devlin Hainsworth address the media in Nairobi after the company announced its half- year results for the period ended December 31, 2012 on February 15, 2013. Photo/Salaton Njau  Nation Media Group

The rapid rise in the cost of lending last year boosted commercial banks’ profits in sharp contrast to manufacturing firms whose performance took a hit from the high interest rates.

Nearly all banks that have announced their results for 2012 have recorded strong growth in profit, while manufacturing firms have either reported a drop in profit or plunge into losses.

The big four banks by assets including KCB, Equity, Barclays and Co-op saw their post-tax profits for 2012 rise by 11.1 per cent, 17 per cent, 7.7 per cent and 43.8 per cent, respectively. Among the top five lenders, only StanChart is yet to release its full-year results for 2012.

In terms of revenues, banks saw their incomes rise sharply with Co-op Bank’s 29.6 per cent being the single largest increase among the four lenders.

The total operating income of KCB rose by 22.2 per cent while that of Equity was 28.5 per cent higher and Barclays was 4.1 per cent up. Of the big banks only Barclays had single-digit growth in total operating income.

“Commercial banks performed very well. They benefited from high interest rates. But other companies such as EABL were negatively affected by the high interest rates,” said Faith Atiti, a research analyst at NIC Securities.

On the other hand, sugar miller Mumias’ half-year results to December 2012 showed it registered a loss of more than Sh1 billion after having recorded a profit in the previous year. The company also saw its revenue fall by 21.6 per cent while the cash flows declined by 129 per cent.

Beer maker East African Breweries Limited (EABL) reported an 18 per cent decline in profit to Sh3.8 billion in the half-year to December 2012, making it improbable that it will record the Sh11 billion it hit for the year that ended in June 2012. EABL’s cash flows went negative in the six months to December 2012.

British American Tobacco (BAT) made a single digit net profit increase of 5.6 per cent, but its cash flow by year end went down by more than three-quarters or 77.7 per cent.

“For British American Tobacco, finance costs were up 96.6 per cent year-on-year to Sh350 million driven by increased borrowing and high interest rates,” said Kestrel Capital analysts in a note to investors.

The cost of loans rose rapidly in late 2011 and remained high for most of last year. Between December 2011 and July 2012, the policy benchmark Central Bank Rate was at 18 per cent, the highest since its introduction in June 2006.

The average yield on the 182-day T-Bill was 13.4 per cent in 2012 compared to 9.5 per cent in 2011. Bamburi recorded a 16.7 per cent decline in net profit even though its sales revenue went up by 4.5 per cent.

What the company described as “other gains and losses” and operating costs were the main cause of the lower profit rather than a decline in sales. The other gains and losses took away more than Sh600 million while operating costs rose by more than Sh2.7 billion or 9.7 per cent.

“Bamburi’s topline was flat. It was negatively affected by cost of goods with the energy charge in Uganda having gone up by 70 per cent,” said Ms Atiti.

Other firms such as Scangroup and Unga Limited saw 13.3 per cent and 43.0 per cent decline in net profit. But in the case of Scangroup it was business expansion that caused its lower performance.

“The weak performance was occasioned by high operating costs, following expansion into West Africa as well as forex losses,” said Standard Investment Bank in its analysis of the results.

For 2012, Scangroup’s operating costs jumped 31 per cent to Sh3.3 billion ahead of billings growth which came at 11 per cent to Sh13.1 billion, but the analysts said the new investment could begin to contribute to the earnings this year.

“The advertising agency started two new operations in Nigeria, Milward Brown Nigeria and Scanad Nigeria mid last year, which could begin to contribute positively to billings financial year 2013,” said the SIB analysis.

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