Currencies

Bank margins shrink on rate capping law

bank

A KCB banking hall in Nairobi. FILE PHOTO | SALATON NJAU | NMG

The banking sector’s return on equity (RoE) has shrunk by nearly five percentage points since June last year, reflecting the lower income banks are getting under the rate cap regime.

The lenders have consistently offered one of the highest returns per shilling invested, helped by large spreads between interest earnings and cost of funds.

“The RoE for the entire industry in June last year was 18.2 per cent but fell in March to 13.6 per cent. For tier one banks it was 34.7 per cent in June last year and it has fallen to 23.1 per cent,” said Central Bank governor Patrick Njoroge on Tuesday.

“These numbers have been falling, reflecting the lower levels of profits in some of these institutions.”

Return on equity measures the profitability generated by each share, giving investors a measure of how much they are getting from every shilling invested.

Comparatively, Kenyan bank owners have in the past enjoyed a far higher return compared to peers on the continent and across the globe.

The average return for European banks last year stood at seven per cent, while that of South African banks was 13 per cent. Nigerian banks have a RoE of about six per cent, among the lowest on the continent.

Banks have been slowing down their lending to the private sector for the past one year, and even though some of them have increased lending to government, the interest income for the sector has come down.

The falling profitability, therefore, calls into question the decision by banks to shun lending to customers in reaction to the rate cap.

It remains to be seen for how long they will hold out.

Top-tier banks, however, remain above sector average in returns to investors.

Analysis by Dyer & Blair Investment Bank shows that by the end of March, Equity Bank #ticker:EQTY and Co-operative Bank #ticker:COOP had returns on equity of 24.3 and 20.3 per cent respectively.

Standard Chartered #ticker:SCBK and KCB #ticker:KCB had returns of 18.3 and 18 per cent respectively, while DTB #ticker:DTK and Barclays #ticker:BBK got 14.7 per cent and 15.9 per cent.

The listed tier one banks have as a result seen their shares enjoy a stronger rebound, compared to their smaller peers, from the post-rate cap price slide at the bourse.

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