Banks defy interest rate caps to grow profits by 6 per cent

Kenya Bankers Association officials Frank Ireri (left) and Habil Olaka at a past event.  FILE | NATION MEDIA GROUP
Kenya Bankers Association officials Frank Ireri (left) and Habil Olaka at a past event. FILE | NATION MEDIA GROUP 

Commercial banks overcame a tough operating environment to record a 6.4 per cent growth in profits before tax in the 10 months to October, even as the industry remains clouded by gloom that has seen some lenders cut jobs to protect their margins.

Data from the Central Bank of Kenya (CBK) shows that the banking industry recorded Sh130.3 billion in profits for the period to October compared to Sh122.4 billion in a similar period last year.

The improved performance came despite fears that reduced public confidence in the sector that followed collapse of three lenders in the last 12 months, the coming into force in September of a law capping interest rates and a general slowdown of the economy — as reflected in the piling up of bad loans — would affect the lenders’ profitability.

In October, the first full month after the law capping interest rates came into force, bank profits rose by Sh9.3 billion, higher than the Sh8.2 billion recorded in the same month last year.

The October profits were, however, the lowest recorded in a month this year, signalling to a possible slowdown in the servicing of loans.

“Most interest rates charged on loans during the year were high, which explains the year on year growth but it is a slowdown on a month to month basis,” the head of research at Standard Investment Bank, Francis Mwangi, said.

Disproportionate profits

Mandatory reduction of lending rates reduced the interest margins across an industry that had previously been criticised for enjoying disproportionate profits at the expense of the rest of the economy.

Notably, the industry’s loan book grew by Sh23 billion during the month, to Sh2.29 trillion, the largest absolute increase reported by the lenders this year.

Slow credit growth has been a source of concern for the government because it often acts as a precursor to a stagnant economy in which the private sector is taking in less capital.

Interest rates are currently capped at 14 per cent, down from the previous average of 18 per cent, with some borrowers paying as high as 24 per cent.

Lower lending rates were expected to drive up borrowing by the private sector and reinvigorate the economy.

The grim economic times have seen households and businesses fall behind their loan repayments, resulting in continued growth of bad loans.

The bad loans book grew by Sh6 billion to a record Sh213 billion in October, according to the CBK data.

Customer savings with banks dropped by Sh26 billion in October, from the previous month, to Sh2.66 trillion, underlining the tough economic times in which people are saving less.

“The increase in gross non­-performing loans was mainly attributable to challenges in the business environment that led to cash flow constraints for borrowers,” says the CBK in its Credit Survey Report dated September this year.

Deep job cuts by companies struggling to cushion their profit margins have left many households with the grim choice of either honouring loan repayments from diminished income or defaulting on their obligations to meet basic needs.

The drop in household incomes has hit consumer spending power, in turn shrinking the overall demand for goods and services.

Shed jobs

Banking is among industries that have shed jobs to protect their profits. The list of lenders that have reduced their staff numbers during the year includes Equity Bank, Co-operative Bank, First Community Bank, Family Bank, NIC Bank and Sidian Bank.

More than 10 banks, including Barclays, NIC, Family, Consolidated, National Bank, ABC and Paramount, reported a drop in profits for the nine months to September, indicating the industry growth was not felt by all players.

Mr Mwangi noted the drop in deposits was not alarming as the industry’s loan to deposit ratio remains below 90 per cent, showing banks have room to continue lending without pressure to book expensive deposits.

The industry loan to deposit ratio currently stands at 86 per cent. Some investors, including insurers, have been moving their savings from banks, opting to lend it to the government which is paying better without the risk of default.

Analysts said they expect banks to pay lower dividends this year as they continue to grapple with higher non-performing loans and the probability of injecting new funds in the lenders who are facing new capital requirements next year.

“Shareholders of listed banks now face reduced dividends as the lenders divert resources to cushion [themselves] against mounting bad debts that have rocked the industry... reducing the amount of profit allocated to dividends,” said Kingdom Securities analysts in a note to clients.

“In Kenya, the central bank’s prudential guidelines require all institutions to maintain adequate provisions for bad and doubtful debts prior to declaring profits or dividends. The banks are also required to limit the amount of interest they can recover on non­performing loans.”