Bank investment returns forecast to drop by half on rate caps

Bank shareholders could lose half of the current returns on investment in the next financial year as lenders adjust to the capped interest rate regime, an analyst said on Tuesday.

Ecobank researcher George Bodo said return on equity, the profitability generated for each share, will reduce from the current average of 18 per cent to 10 per cent.

“We do not expect to see much impact of the rate caps in quarter four but we will start seeing effects in quarter two next year and full-year results,” Mr Bodo said on Tuesday.

Ecobank, which has a continental presence in 36 countries, said Kenya had the widest spread (difference between cost of funds and that of loans) in Africa at around 11 to 12 per cent almost same as Ghana.

After applying the Banking Amendment Act, the spread will drop leaving Ghana with the most expensive loans. Nigeria, which is counted as a region by the Pan African bank due to its large population and economic size, is lowest at six per cent.

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Ecobank researchers also see a flight to quality loans by mobile lenders once the rate cap is applied to micro loans.

They said banks were able to carry huge volumes of bad loans at about 30 per cent delinquency with the high rates, something they may not be able to do with maximum rate fixed at 14.5 per cent.

Banks are, however, not waiting to take a hit as they are reviewing their structures to weather the changes.

Lenders are already pulling all manner tricks, which may erode the intended effects of the new banking legislation to reduce the cost of borrowing.

Consumers of financial services reported their banks had introduced a raft of new levies that may effectively deny borrowers any meaningful reduction in the cost of loans.

Banks are also looking for loopholes in the law to avoid classifying accounts as interest earning deposit accounts or applying caps on mobile loans.

Since the law came into effect, the lenders have also shown inclination towards government securities to protect their bottom line.

“The banks shares have taken quite a beating from the enactment of the new law on lending and deposit rates. But all is not lost. Banks may only see up to 30 per cent fall in their profits, as they still have fixed-income instruments to fall back on, according to AIB.

“The government’s appetite for debt is still quite high. That is the only thing going for banks. If the government wasn’t too hungry, then there would be a problem,” said Paul Mwai, the chief executive of AIB Capital.