Kenya Commercial Bank (KCB) has overtaken Equity Bank as the most profitable lender as the institutions shrug off the high interest regime to grow half year net profits by double digits.
KCB’s net profit increased 50 per cent in the six months to June to Sh6 billion compared to Sh4 billion in a similar period the year before, beating Equity’s which rose to Sh5.4 billion from Sh4.7 billion.
Equity was the most profitable lender in the first quarter, ahead of KCB, Standard Chartered, and Barclays.
Though the high cost of credit reduced demand for loans, KCB and Equity grew their earnings on a wider net interest margin — the difference between lending and deposit rates.
KCB’s loan book grew by Sh3.3 billion compared Sh23.5 billion in the preceding half while Equity’s dropped to Sh11 billion from Sh15 billion.
“The high interest rates have widened the margins of banks, especially those strong in the retail market like KCB and Equity Bank,” said Gregory Waweru, an analyst at Kestrel Capital.
Equity, for instance, enjoyed a net interest margin of 12.6 per cent in the first half compared to 11.7 per cent in 2011.
The industry’s margin stood at 11.7 per cent in May compared to 10.2 per cent in the same months last year.
Equity’s profit was, however, weighed down by a 30 per cent corporate tax rate compared to 20 per cent in previous years as its five-year tax relief for listing at the Nairobi bourse ended. It listed in August 2006, which means that first half of last year was based on the lower tax rate.
Kenyan banks hinge their results on lending income.
KCB’s interest on loans rose 73.1 per cent to Sh16.8 billion from Sh9.7 billion. This helped raise its income to Sh21.9 billion from Sh16.8 billion, reflecting a 30.3 per cent increase.
The bank also benefited from lower operating expenses following the restructuring of its business last year. This saw it reduce its executive team from 22 to seven, with scores of staff taking up its voluntary retirement offer.
The bank’s cost to income ratio dropped to 56.4 per cent from 62.8 per cent, with its chief executive Martin Oduor-Otieno saying it is targeting even lower cost ratios.
“We want to reduce our cost to income to 51 per cent in the short term,” Mr Oduor-Otieno said. He added that KCB will now focus on consolidating its regional operations that contributed Sh486.4 billion to the group’s net profit in the first half compared to Sh264.5 million in the same period last year.
Analysts say banks will continue to rely on the higher interest margins to ride out the dip in new borrowing in the short term.
“The higher margins are coming to cover for slower growth in new loans and advances,” Mr Waweru said.
Lending rates shot to above 20 per cent in last year’s fourth quarter from a low of 14 per cent in January last year due to tight liquidity as the Central Bank of Kenya (CBK) raised its signal lending rate to a high of 18 per cent to tame runaway inflation.
This has hit the appetite for borrowing in the entire sector whose loan book has stagnated at Sh1.2 trillion since September to April. But this has not stopped banks from making money.
Kenyan banks have reported a 37.7 per cent rise in the five-month profits to May compared to 20.5 per cent last year riding on high interest spreads, says the CBK.
Data from the CBK shows that the banks’ profits were at Sh43.79 billion as at May, compared to Sh31.8 billion in the same period last year.
This performance is what has made banking stock among the most sought after at the Nairobi Securities Exchange (NSE) with the promise of a steady flow in dividends in a bourse where opportunities for capital gains have dimmed.
Equity Bank share has risen 39.06 per cent in the past six months to Sh22.5 , outperforming the benchmark NSE-20 Share Index that gained 20.2 per cent over the same period. Its rival KCB has gained 37.1 per cent in the six months to Sh24.25.
