High appetite for loans gives banks 12.5pc profit growth in five months

Kenyan banks have recorded a 12.5 per cent growth in profit before tax in the year to May, in a way validating the huge investor appetite for the stocks at the Nairobi Securities Exchange.

The lenders made Sh54.8 billion before tax in the five months compared to Sh48.7 billion by May last year riding on increased market demand for loans. In April and May, the lenders loaned out Sh65 billion to push the total industry loan book to Sh1.75 trillion.

“The banking sector has recorded an improved performance – the sector’s balance sheet expanded by 15.6 per cent to Sh2.89 trillion in May from Sh2.5 trillion in May 2013 mainly supported by an expansion of banking services and financial inclusion,” said CBK governor Njuguna Ndung’u.

Analysts see the bank profit growth as driven by relatively cheap lending to the private sector.

“CBK has been indicating there is high liquidity in the market signalling that the cost of funds may have dropped,” said Francis Mwangi, head of research at Standard Investment Bank.

Banks announced a near halving of their interest expenses in the first quarter of the year.

The performance has been behind the recent rally of bank stocks at the Nairobi Securities Exchange (NSE), with the segment up 16.4 per cent from the beginning of the year and analysts expect it to continue attracting investor attention in the coming months.

Bad loans have, however, been a blot on the industry’s performance having touched Sh95 billion at the end of March, indicating growing difficulties among borrowers to meet their obligations.

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Increasing bad loans are accompanied by higher loan loss provision, which eats into a bank’s earnings.

The growth of bad loans has been attributed to delayed payments by the government to contractors due to a cash crunch.

The Treasury has, however, raised Sh170 billion ($2 billion) from the international markets through a sovereign bond which it is hoped will help it clear its debts as well as pull interest rates down.

The high loan uptake has compensated for the marginal drop of interest spreads following a drop in the cost of loans.

The margins could, however, shrink further in the remaining part of the year with the introduction of the Kenya Bank Reference Rate, a formula that takes effect next week.

The rate will be an average of the 91-day Treasury bill rate and the Central Bank Rate. It will serve as a standard base rate in the industry and is expected to pull interest rates down on peer pressure among the lenders.

Several banks are undertaking capital raising activities to fund their expansion, underlining the bullish outlook. DTB is currently raising Sh3.6 billion through a rights issue while NIC and National Bank have also announced cash calls.