Banks have emerged as the big winners in a difficult economy characterised by high interest rates, as companies in other sectors struggle to generate profits and give returns to their shareholders in form of dividends.
Companies in sectors such as manufacturing, services, investments, energy and agriculture have reported significantly lower profit growth over the first half of 2024 when compared to banks, whose earnings were boosted by high interest rates.
The non-bank firms have cited factors such as reduced demand for goods and services, high cost of credit, exchange rate fluctuations and costlier inputs as some of the reasons for their slow earnings growth.
These misfortunes have created a market opportunity for banks, helping the lenders generate outsized returns, with executives earning handsome pay and bonuses while shareholders enjoy a dividend bounty.
The 10 listed Kenyan banks collectively reported a 27 percent or Sh25.2 billion rise in net profit to Sh119.82 billion in the six months to June, their respective financial filings show.
Their net interest income over the period grew by 18.5 percent to Sh236.3 billion, while non-funded income was up 13 percent to Sh145.6 billion. The growth in the two income lines helped soften the impact of a rise in cost of funding or interest expense by 54.5 percent to Sh117.1 billion.
Unlike non-bank firms, which have limited options to cushion against economic shocks, analysts say that the lenders have been able to lean on risk-based pricing of loans to protect their margins.
“The approval of their risk-based pricing plans has enhanced their pricing power compared to earlier years, widening their margins even in the face of deteriorating asset quality as bad loans go up, and the rising cost of funding,” said Ronnie Chokaa, a senior analyst at AIB AXYS Africa, a Nairobi-based investment bank.
“Consumer trends have also helped the banks, with the growing volume of digital transactions boosting non-interest earnings and helping keep a lid on growth of costs associated with running physical outlets.”
The ability of banks to charge higher interest charges has meanwhile been one of the major sources of difficulties for the other companies, which rely on credit to fund their operations and working capital.
Manufacturing firms have particularly taken a hit from the increased cost of funding due to their large capital needs.
This increase in finance costs, at a time when inputs have also become more expensive, has been a factor behind the reduced profitability of listed companies such as EABL, BAT Kenya and Flame Tree Group.
EABL’s net profit for the year ended June 2024 fell by 12 percent to Sh10.9 billion, while BAT Kenya’s net earnings for the half year to June declined by 24 percent to Sh2.14 billion.
Flame Tree Group, which fell into a half-year net loss of Sh90.6 million compared to a profit of Sh6.8 million in the first half of 2023, said that it has had to increase its borrowing significantly to finance raw material purchases, responding to a sharp rise in input prices.
“While this was crucial for maintaining production levels, it also led to higher finance costs, which have constrained cash flow and limited growth opportunities,” said Flame Tree Group on August 28 when it released its 2024 half-year financials.
Other shocks hitting the sector are high taxes, falling consumer demand to high cost of living and exchange rate fluctuations, leading to requests by manufacturers for a stimulus package to help them revive their fortunes in the face of declining sales and margins.
Similar concerns have affected companies in the services sector, where falling demand has hit the bottom line.
WPP ScanGroup, for instance, doubled its net loss for the six months to June 2024 to Sh252.3 million from Sh124.5 million a year earlier, blaming a challenging trading where clients cut their marketing budgets due to economic headwinds.
“The financial results were also negatively affected by the strengthening of the Kenyan shilling, which led to an increase in foreign exchange losses compared to the foreign exchange gains experienced in the previous year,” said the company.
The differing fortunes between banks and the other companies also reflected in the level of returns to shareholders in form of dividends.
The listed banks doubled their collective interim dividends in the half year to Sh13.4 billion from Sh6.7 billion a year earlier, with KCB returning to an interim payout with a Sh1.50 per share issuance.
Stanbic, Standard Chartered Bank Kenya and NCBA enhanced their interim dividend payouts to Sh1.84, Sh8 and Sh2.25 per share respectively from Sh1.15, Sh6 and Sh1.75 per share in 2023. The majority of non-bank firms opted to skip interim dividend payouts, instead looking to conserve capital to avoid expensive borrowing.
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