The top-tier banks are forecast to record double-digit growth in interest and non-interest income this financial year helped by higher interest margins, growing loan books and widespread adoption of alternative banking channels by their customers.
UK-based investment bank Exotix Partners says in a research note on six lenders — KCB, Equity, Cooperative, NIC, DTB and CfC Stanbic — that their loan books will grow by 14.6 per cent in 2016, indicative of a healthy banking industry even as other sectors of the economy go through lean times in growth terms.
On a wider scale, the banking industry’s average net interest margin is projected to increase by 70 basis points year-on-year to 8.2 per cent in 2016.
“Based on our loan growth and margin expansion assumptions, we estimate banks’ net interest income growth – after steadily declining over the past three years — will accelerate to 29.1 per cent in the 2016 financial year,” said Exotix in the note.
“With the exception of CFC Stanbic (whose non-interest revenue dropped because of a decline in its South Sudan operations) and KCB (whose non-interest revenue is increasing off a high 2014 base) we forecast strong double-digit non-interest revenue growth for the rest of the banks (average of 19.4 per cent year on year) driven by a combination of new products and increased volumes as banks’ alternative banking channels continue to gain traction.”
Exotix cites the banks’ ability to restructure their loan books in reaction to rising interest rates as a key factor in maintaining the growth in interest income over the past few years.
Following the interest rates hike of 2011, banks saw their 2012 non-performing loans ratio increase by only 20 basis points, even as the growth of their loan books fell from 35.9 to 11.5 per cent.
Exotix estimates that the average NPL ratio will increase from about 4.1 per cent to 5.4 per cent between 2015 and 2016.
“As in the past, we believe banks provisioning for these additional bad debts will be gradual and therefore assume the NPL cover will drop to 51 per cent from 55 per cent in FY15,” said Exotix.
Banks are also expected to enjoy calmer market conditions in 2016, especially with reduced volatility of inter-bank rates and a more stable currency exchange rate.
This should have a positive impact on the sectors profit margins, which according to Exotix are driven by the expanding margins as banks’ asset yields increase by more than their funding costs in a higher-interest rate environment.
According to CBK data, commercial bank profits in the third quarter of 2015 fell by 5.8 per cent to Sh37.31 billion compared to the previous quarter on the back of high cost of funds as the interbank rate rose to lift the cost of deposits.
There was also tight liquidity in the market as the regulator mopped up aggressively to support the falling shilling.
The stabilisation of the currency starting in quarter four of last year that has extended into 2016 means that the liquidity position has improved, while the interbank rate is now at 4.6 per cent compared to the highs of 25 per cent seen in September last year.