Bank profits hit Sh100bn as high rates boost lenders

The Central Bank of Kenya in Nairobi. The regulator says banks’ pre-tax profits rose from Sh80 billion in November 2011 to Sh98.8 billion in November 2012. File
The Central Bank of Kenya in Nairobi. The regulator says banks’ pre-tax profits rose from Sh80 billion in November 2011 to Sh98.8 billion in November 2012. File 

Kenyan banks’ profits shot to Sh98.8 billion in the eleven months to November last year, setting the lenders on course to exceeding the Sh100 billion pre-tax earnings mark.

The profit figures make banking Kenya’s most dominant economic sector, underlining its ability to ride out uncertain economic times characterised by currency, inflation and interest rates volatility.

At least 10 listed firms have issued profit warnings, an indication that their performance for 2012 would be at least 25 per cent lower than the 2011 results.

“The banking sector registered a 23.5 per cent growth in pre-tax profits from Sh80 billion in November 2011 to Sh98.8 billion as at end of November 2012. Similarly, the annualised return on assets rose from 3.3 per cent to 3.7 per cent over the same period,” reads the Central Bank of Kenya’s report for November.


Analysts attributed the growth to higher profit margins as the gap between interest returns that banks paid depositors and what they charged borrowers for the same cash widened during the year.

Interest income earned on loans contributed 62 per cent of the Sh323.7 billion total revenue generated by the sector compared to 55 per cent of the Sh227.2 billion reported in November 2011.

“For a better part of 2012 growth was being driven by higher interest margins compared to 2011 and with the drop in Treasury bond rates they posted some gains from government securities,” said Francis Mwangi, head of research at Standard Investment Bank.

Government securities contributed 13 per cent of total income last year, being Sh42 billion compared to Sh31.8 billion in 2011.

Equity Bank, which posted pre-tax profit of Sh11.8 billion at the end of September last year, had noted that its interest margins were at a record high during the year.

“At 12.7 per cent in quarter three the net interest margin has remained at a historical high level after increasing by 20 basis points from quarter two,” said Equity Bank.

“In addition to customer acquisition in an efficient manner on both assets and liabilities sides the bank has focused on subordinated debt to improve interest margins.”

Though the regulator started to reduce the indicative Central Bank Rate in July last year, banks have been slow to transfer the reduction to their customers stating that they were still holding expensive fixed deposits.

The Central Bank had switched to a high interest rate environment in efforts to control inflation rates and stabilise a volatile shilling in 2011.

Although most of the banks maintained the high interest rates the industry loan book grew by 12.5 per cent to Sh1.35 trillion, which was, however, accompanied by a proportionate increase in non-performing loans which grew to Sh62.2 billion from Sh55.1 billion in November 2011.

Customer deposits increased to Sh1.78 trillion compared to Sh1.5 trillion a year earlier indicating the industry’s efforts in financial inclusion are bearing fruit.

Banks have been accused of making “abnormal” profits at the expense of other segments of the economy. Firms that have issued profit warnings this year cited high financing costs as a major contributor to their woes.

Outcry over high cost of loans had seen MPs attempt to regulate the sector arguing that it earns huge profits at the expense of borrowers.

Notably, during the period it enjoyed higher margins since they increased lending rates at a faster pace than the deposit rates.

The lenders have argued in defence that banking business is capital intensive and the shareholders have to be rewarded in equal measure. The high returns have seen stocks of listed banks become top performers at the stock market.

Bank shareholders have also shown confidence in their companies’ performance by injecting additional capital to fund growth plans and comply with regulatory requirements.