Capital Markets

Bank costs fall on digitisation and higher interest income

kcb

A customer is served at the Kenya Commercial Bank (KCB) in Nairobi on January 24, 2018. PHOTO | SIMON MAINA | AFP

Listed banks improved their efficiency in the first half of the year after keeping a lid on costs while enjoying higher profits in a recovering economy that supported higher lending and fee income.

In the first half of the year, seven of the 10 local listed banks cut their cost-to-income ratios—the exceptions being KCB, Standard Chartered Kenya and DTB— meaning they were effectively spending less to generate every shilling of income.

Analysis done by Dyer & Blair Investment bank shows that the average ratio for the 10 lenders in the six months to June 2022 was 50.15 percent, compared to 54.2 percent in the first half of 2021.

Lenders have been leveraging on digitisation to cut overheads, and at the same time increase their non-funded income through the fees that use of these alternative banking channels generate.

Interest income also rose in line with higher lending volumes—with annualised growth in credit to the private sector growing from 8.6 percent at the end of 2021 to 12.2 percent in June.

It went up further to a six-and-a-half year high of 14.2 percent in July, before retreating to 12.5 percent in August as a result of businesses exercising caution during the General Elections period.

“The sector-wide improvement in efficiency was mainly bolstered by total operating income growing at a faster pace than operating costs (excluding provisions),” said Dyer & Blair.

“This improvement points to the fact that banks are increasingly continuing to leverage their alternative banking channels to both boost non-funded income and reduce costs.”

Dyer & Blair however noted that lenders that have concentrated on improving the quality of their assets (loan books) have suffered on the cost side—where a fall in non-performing loan ratios has been matched with a higher cost-to-income ratio.

“Whilst both asset quality and efficiency levels are influenced by a number of factors, we believe that the aforementioned relationship paints a picture of how asset quality improvement is partly determined by bank initiatives – which can prove costly,” said the investment bank.

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