- Lenders earn less than one per cent on loans under the new law that caps lending rates
Banks that have issued corporate bonds at high rates for on-lending face thin trading margins under the current rate-capping regime.
This may mean the institutions could stop issuance of any remaining tranches or sharply cut offered rates going forward.
The lenders raised bonds with coupon rates of about 13.6 per cent meaning their margins — the difference between a product or service’s selling price and its cost — is less than one per cent once they apply the requirement of the Banking Amendment law which caps lending rates at 14.5 per cent.
“It is a fact that those banks which were raising funds in wholesale markets are essentially now priced out of the banking business. This is a Schumpeter moment of ‘creative destruction’ and these banks need to quickly look at their business model,” Aly-Khan Satchu, the CEO of investment advisory firm Rich Management Ltd said.
Consolidated Bank issued two seven-year fixed notes in July 2012, with its Sh1.4 billion issue fixed at 13.25 per cent coupon rate while the Sh1.9 billion bond was issued at 13.6 per cent.
CFC Stanbic, which issued a seven-year bond in 2009 has a coupon rate of 12.5 per cent on its Sh24 billion bond.
I&M’s 2013 medium term Sh226 million bond is paying 12.8 per cent while NIC Bank is paying 12.5 per cent on a Sh5 billion bond issued in 2014.
Commercial Bank of Africa (CBA) has a Sh7 billion note that pays 12.7 per cent while Chase Bank’s fixed Sh4.8 billion note is paying 13.2 per cent.
Mr Satchu said the banks are stuck with the costly fund unless they trigger a clause in the contracts which frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties occurs.
“The bonds cannot be repriced unless the banks can characterise the interest rate law as a ‘force majeure’ but that is a very remote likelihood,” Mr Satchu said.
Maurice Oduor, an investment manager at Cytonn, said new issues will be at lower rates since banks cannot afford the high costs.
“I think banks will continue to use this as a source of funding but it will not be at the pricing that we have seen historically. Given that the lending rates are capped at 14.5 per cent for now, it will not make sense for a bank to raise capital at the historical levels of 13 per cent,” Mr Oduor said.
Some bank insiders, however, played down the effect of bond market activity under the rate-cap regime saying most banks issue bonds to fund acquisitions, major capex, losses and to improve tier-1 capital adequacy ratio rather than for lending.
The cost of funding will be key to banks’ survival with the deposit rate also capped at 7.5 per cent. Banks will be looking for deals outside the usual, including increasingly going for funding from international finance institutions.
The African Development Bank (AfDB) recently gave Equity Bank Sh15 billion ($148 million) credit priced at about 2.5 per cent, which the lender was expected to advance at about 10 per cent lending rate to enterprises.
AfDB also gave Chase Bank Sh5 billion ($50 million) for on-lending. The lender also got a Sh1.12 billion credit line from French Development Agency (AFD) to finance green energy projects.