Markets & Finance

Co-operative Bank overtakes StanChart in the profitability ranks

COOP

A Co-operative Bank outlet in Nairobi. Equity retains first position among top lenders despite shareholders’ funds dip to 29 per cent. PHOTO | FILE

Co-operative Bank has overtaken Standard Chartered in terms of return on equity (ROE) or shareholders’ funds among the top five commercial lenders.

New numbers released by Nairobi-based Cytonn Investments show Co-op Bank also overtook several other listed commercial banks including Barclays, NIC, I&M and DTB in ROE or profitability.

At the same time, Equity Bank despite slipping from 29 per cent, retained the top position among the top five banks with the highest ROE at 25.5 per cent against second-placed Co-op Bank’s 25.1 per cent.

However, in terms of the growth in the earnings per share (EPS), I&M bank came top with 26.2 per cent increase and was billed in the Cytonn report as the fastest growing listed bank.

Co-op Bank and I&M achievements were all the more notable against slight EPS growth of 2.8 per cent for all listed banks.

“Kenya banks recorded much lower earnings growth, driven by the challenging economic environment in 2015, with the high interest rates which reduced credit uptake especially by the private sector,” said Cytonn Investments private equity manager Shiv Arora.

Interest rates rose in the fourth quarter of last year after the Central Bank of Kenya (CBK) raised the benchmark policy rate in a span of a few months to 11.5 from 8.5 per cent.

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The price of money rose after the CBK attempted to control the depreciation of the shilling after it fell by 13 per cent in a matter of weeks to nearly 106 units to the dollar.

Mr Arora noted that deposit growth had been slow compared to the expansion of the banks’ loan books. Many depositors preferred to invest in government paper where returns exceeded 20 per cent on an annual basis. The average fixed deposit rate did not even hit eight per cent.

“The high interest rates, which reduced credit uptake especially by the private sector… at the same time [had] a profound effect on deposit mobilisation as most depositors greatly preferred to invest in government securities at the time,” said Cytonn Investments.

Cytonn chief investment manager Elizabeth Nkukuu said corporate entities, including banks, were likely to do better this year than last year as the economic environment improved — projecting a gross domestic product growth rate of between 5.5 and 6.0 per cent.

“We expect this year to be better for corporate earnings due to the relatively improving interest rate environment, stable shilling and improvement in credit growth,” said Ms Nkukuu.

She said that the biggest issue for commercial banks and listed firms appear to be corporate governance. In recent times, issues of corporate governance have arisen with regard to listed companies such as National Bank of Kenya and Uchumi Supermarkets. For those that are not quoted, Imperial and Dubai banks have collapsed, partly because of issues relating to corporate governance.

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Morris Oduor, investment manager at Cytonn, said that mergers and acquisitions were expected to continue in the banking sector owing to the heavy capital requirements and need for expansion.

Mr Oduor pointed to the takeover of Equatorial Commercial Bank by Mwalimu Saccco, Giro bank by I&M and Fina Bank by GTBank as examples of the possible direction for other institutions that intend to grow further.

With regard to cost-to-income ratio — which is an indication of efficiency of a bank — the listed banks saw the average rise by nearly seven per cent to stand at 59.4 per cent due to monetary policy action.