Capital Markets

Banks profit measure beat high interest rates years


Kenya Bankers Association chief executive Habil Olaka. PHOTO | DENNIS ONSONGO | NMG

Banks’ profitability, measured by their return on equity or shareholder funds hit a record high last year as lenders continued to defy the impact of interest rate caps and subsequent administrative controls that has stopped them from freely pricing credit as was the case in 2015 and earlier years.

According to data from the Central Bank of Kenya, the industry’s return on equity (RoE) hit a record 26.5 percent in 2022, beating 2015’s level of 23.9 percent.

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The RoE measures how well a bank is managing the capital that shareholders have committed to it.

Interest rate controls were introduced in September 2016, with the main argument being that the lenders were enjoying some of the highest returns in Africa aided by interest rates that topped 25 percent in some cases.

The industry saw a reduction in earnings performance in the initial years following the introduction of interest rate caps, with the RoE, for instance, slumping to 20.8 percent in 2017 from 24.6 percent in 2016.

It fell further to 14.2 percent in 2020 as the effects of the Covid-19 pandemic cut the sector’s profitability in the year.

The rate caps were removed in November 2019 but banks have not been free to price credit as they see fit.

Instead, the CBK introduced a stringent screening process for approving a new model of risk-based lending, which is yet to be obtained by all the lenders and which has kept the top lending rates below 20 percent.

Recent disclosures by the Kenya Bankers Association (KBA) reveal 22 of 38 banks have obtained the regulatory nod to reset loan costs for risk in a list that largely covers mid and small-tier banks.

Absa, Stanbic Bank Kenya and Equity Bank have been the first Tier I banks to receive a nod with the latter announcing the start of risk-based pricing on loans from January this year.

On its part, Absa Bank Kenya has noted it sees the opportunity for risk-based pricing in the second half of 2023.

Other large banks have been in different stages of risk-based loan pricing approval.

Banks have meanwhile moved aggressively to cut costs and invest in new growth areas such as regional diversification, wealth management and digital banking in response to the twin challenges of the pandemic and restricted pricing of credit.

The effect has been record earnings, with the performance helped by higher contributions from non-interest income and regional subsidiaries.

Last year, the banking sector recorded a 22 percent rise in net profits to Sh175.3 billion from Sh143.7 billion in 2021 with the industry nearly doubling its earnings in a decade from Sh88 billion in 2013.

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The industry’s total operating income in the year rose by 18 percent to Sh557.9 billion from Sh473.2 billion.

The higher income in the period is largely due to a 29 percent growth in non-funded income to Sh189.4 billion from Sh146.7 billion.

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