CBK says large banks flourishing as small players wobble under huge operating costs

Central Bank of Kenya (CBK) has noted a widening gap between top performers and banking industry laggards that is likely to impact on competition and public confidence in the sector.

Top performing banks have been recording healthy profit growth and return to shareholders while bottom players have been eating up into shareholders wealth.

“The overall performance remains uneven among banks despite strong growth in profitability, assets base, return on assets and return on equity.

The top five banks remain far apart from the bottom five banks across all the five performance indicators,” said CBK in the latest financial sector stability report.

As at end of 2014, the bottom five banks recorded negative return on equity, with Equatorial Commercial Bank being the worst performer on this parameter at negative 39 per cent.

The other bottom performers were Nigerian-owned UBA with a return on equity of -29.9 per cent, State-owned Consolidated Bank (-17.5 per cent), Credit Bank (-7.8 per cent) and continental supranational Ecobank at negative 6.4 per cent.

Equity Bank recorded the best return to shareholders of 49.4 per cent followed by Standard Chartered and I&M Bank, which had a return of 35 per cent.

“It is a concern because any poor financial health among the smaller players can potentially reverberate across the industry, as was typified by the two failures in 2015,” said head of banking research at Ecobank Capital George Bodo.

Mwalimu Sacco majority-owned Equatorial, Credit Bank and Consolidated are currently raising capital as they seek to remain compliant to regulatory requirements and grow their business.

READ: Top banks seen posting double-digit interest income growth

Ecobank and UBA parent companies have deep pockets, ranking among the top 1,000 banks in the world and top 10 in Africa but they are yet to crack the Kenyan market.

Analysts attribute the varying performance in the sector to top players enjoying mobilisation of cheap deposits and having large balance sheets that allow them to fund big loans.

“Larger banks have the muscle and bargaining power to continue normally when macroeconomic conditions change (for instance increase in interest rates). On the other hand, smaller banks may seek for additional funding either through expensive deposits or debt to stay in competition,” said head of research at Burbidge Capital, Vimal Parmar.

The Central Bank has also been pushing for more even distribution of liquidity within the sector, with more than half of total industry savings held by the five large players.

In the stability report, the CBK governor said stress tests had shown a sudden five per cent withdrawal of deposits would pull two small lenders below mandatory levels.

Following the collapse of Imperial Bank in October last year, small banks witnessed a run on deposits forcing the Central Bank to step in and support their liquidity needs.

Calls for consolidation within the sector have not had much success, with the country having 43 banks, which some analysts say are too many for an economy the size of Kenya.

Central Bank suspended the licensing of new banks last year but kept the option of consolidation open.