Cash-rich listed firms are set for higher finance income in the near term due to elevated interest rates on offer on fixed deposits and government paper, potentially boosting their bottom line in a period when tough economic conditions have hurt corporate earnings.
Analysis of listed firms shows multiple companies hold substantial amounts of cash in hand while also retaining low debt levels, pointing to a net gain from the higher interest rates in the market.
Some of the companies with significant cash and cash equivalent holdings as per respective latest financial filings include TotalEnergies Marketing Kenya at Sh13.28 billion, Liberty Holdings at Sh10.87 billion, WPP Scangroup at Sh3.47 billion, and Nation Media Group at Sh3.7 billion.
Others are Bamburi Cement at Sh3.85 billion, Williamson Tea Kenya at Sh1.02 billion, Sasini at Sh871 million and the Nairobi Securities Exchange (NSE) at Sh531 million.
However, firms that are also exposed to debt are looking at a hit once their facilities are adjusted to reflect the prevailing interest rate levels.
Latest data from the Central Bank of Kenya (CBK) shows that the average deposit rate among commercial banks rose to 9.11 percent by the end of October 2023, from 7.47 percent in January.
The rate is likely to have gone up further toward the end of the year, following the CBK’s move to raise its base lending rate by two percentage points to 12.5 percent. The higher central bank rate (CBR) saw commercial banks queue to raise their loan rates, and also fixed deposit rates to keep them competitive in the fight for long-term customer deposits.
Companies keeping their cash holdings in government securities have also enjoyed higher rates over the past year.
Treasury bills across all three tenors have now seen their rates rise to 16 percent, reflecting both the change in the CBR and prevailing risk assessment by investors of the government’s debt. At the beginning of 2023, the Treasury bills were paying between 9.3 percent and 10.3 percent.
Rates on Treasury bonds have also gone up in the period, touching a high of 17.93 percent for the tax-free infrastructure bond sold in November.
Companies started building up their cash piles or retained earnings from 2020 when the Covid-19 pandemic struck, using these funds as a buffer against the resulting uncertainty and dip in earnings.
While the end of the pandemic saw some firms loosen their purse strings and distribute part of the cash to shareholders as dividends, subsequent uncertainty due to the Russia-Ukraine war and the General Election of August 2022 meant that the conservative approach largely remained within the market.
A robustly growing economy offers companies opportunities to deploy capital aggressively in pursuit of reasonable returns, while a difficult macroeconomic environment has the opposite effect as many adopt a more cautious stance.
Companies also retain earnings as a financial management tool, especially when they are unsure of the direction of interest rates.