Lender shakes Kenya’s besieged banking industry with announcement of a Sh9.1 billion dividend amid interest rate caps.
KCB Group yesterday shook Kenya’s besieged banking industry with the announcement of a Sh9.1 billion dividend payout for the year ended December 2016, the largest ever by a financial services firm.
The bank, which is Kenya’s largest by assets, announced it was paying shareholders a dividend of Sh3 per share, a 50 per cent increase from the previous year’s Sh2 per share.
The amount represents a 52 per cent increase in absolute terms because the new dividend is being paid on a larger volume of shares following the issuance of 40.8 million new shares last year.
The extra shares were used to pay a section of shareholders, who elected to receive half of their dividend in the form of stock as KCB moved to conserve cash at the time.
KCB said it had increased the dividend payout after a marked improvement in its financial position.
“We have generated fairly good results and we also raised Sh7.5 billion in debt financing to boost our capital. This has given us the headroom to share out the dividends,” KCB’s chief financial officer Lawrence Kimathi told the Business Daily.
He said the decision to pay out half of the previous year’s dividend through its own stock – technically known as a scrip dividend — was informed by the tight capital position at the time.
KCB had hoped to save Sh3 billion through the share allotment plan but managed to conserve Sh1.5 billion as some shareholders applied to receive the entire dividend of Sh2 per share in cash.
Analysts say cash-rich banks are likely to return more capital to shareholders as they pull back from risky lending in the wake of controlled interest rates, a move that also eliminates the problem of operating with excess capital.
“The 50 per cent year-on-year dividend per share increase … is reason to believe management will remain more conscious of maximizing return on equity in place of delivering dilutive growth and retaining excessive capital,” Standard Investment Bank (SIB) said in a review of KCB’s performance.
KCB is the first among the big banks to raise its dividend payout, while NIC and Barclays maintained theirs at Sh1.25 and Sh1 respectively.
Stanbic Holdings cut its dividend per share to Sh5.25 compared to Sh6.15 the previous year.
KCB’s dividend announcement sparked a rally in the lender’s stock, which gained 5.5 per cent yesterday to close at Sh28.5 as investors jumped in before the cutoff date of April 24. The dividend will be paid on May 26.
At Sh3 per share, the dividend represents a yield of 10.5 per cent which beats returns on the 91-day T-bill that currently stands at nearly nine per cent.
KCB is among the listed banks whose share prices collapsed after legislation introducing interest rate controls was signed last year, with the stock routs now raising the dividend yields for lenders that continue to pay dividends.
The lender lifted its payout despite reporting a flat net profit of Sh19.7 billion in the review period following weaker earnings from its subsidiaries in the region.
Its net profit stood at Sh19.6 billion a year earlier. Nearly all of its earnings came from Kenya, compared to the previous year when the bank earned Sh3.1 billion from the regional units.
“The contribution of the international business dropped to less than five per cent as a result of the devaluation of the South Sudan pound and accounting for the hyperinflationary environment in the country resulting in an overall negative impact on net monetary position,” KCB said in a statement.
The bank added that the debasement of South Sudan’s currency also contributed to an 11 per cent drop in net fees and commissions to Sh12.6 billion.
Its loan book grew 11.4 per cent to Sh385.7 billion, helping to raise total interest income 11.3 per cent to Sh62.8 billion.
The net interest margin –the difference between lending and deposit rates— declined to 11 per cent from 9.1 per cent, partly due to the capping of interest rates starting September.
This came as the average return on loans, government securities and other assets dropped to 12.59 per cent from 13.46 per cent while cost of funds increased to 2.8 per cent from 2.74 per cent.
KCB forecast its net interest margin would fall further to range between 8.5 per cent and nine per cent this year as the impact of controlled interest rates builds up.
The bank’s operating expenses increased 11.9 per cent to Sh40.3 billion despite an 11.8 per cent reduction in loan loss provision to Sh3.8 billion.
The bank’s bad debt rose 35.5 per cent to Sh31.8 billion in what it attributed to defaults by a few large corporate borrowers.