Quarter three banking sector profit fell by 9.4 per cent to Sh76.6 billion even as lenders turned to non-funded income and government securities to soften the blow of lower interest margins.
Analysis of the banking sector profit numbers shows that the drop across comparative reporting periods in 2016 and 2017 was at its peak at the half year mark, indicating banks are getting to grips with the implications of the law.
As at June, the year-on-year drop in net profit stood at 11.2 per cent while at the end of March it had fallen by 10.4 per cent compared to the first quarter of 2016, sector financial data compiled by the Business Daily shows.
When the rate cap was signed into law in August 2016, analysts and banks had projected much leaner times for the industry, with some expectations that there would be a realignment among the players in the highly fragmented sector.
In a note immediately the law was signed, Standard Investment Bank said it expected slow or negative loan book growth, decreased net interest margin (NIM), an increased push for use of alternative channels and overall reduction in industry profitability.
Lenders financial results have largely followed this script, resulting in lower interest expenses and higher non-funded income.
The investment bank added that down the road, it expected to see mergers, acquisitions and in the worst case scenario closures among tier three and smaller tier two lenders who struggle for liquidity.
The expected mergers have not materialised a year down the line, although Habib Bank Kenya, Giro Bank and Fidelity Commercial Bank were acquired by larger lenders DTB #ticker:DTBK , I&M Bank #ticker:I&M and SBM Bank of Mauritius respectively during the year.
To cope with the reduced interest from customer loans, which fell by 14 per cent to Sh213 billion in the nine month period, lenders turned to government lending and cheaper sources of funds to finance their loan books.
Holdings of the securities rose by 15.7 per cent to Sh1 trillion by the end of September, in turn raising the interest income from securities by 11.2 per cent to Sh81.2 billion in the period.
Interest expenses fell by 8.2 per cent to Sh102.4 billion, as the lenders migrated a large number of interest paying accounts into transactional accounts after the imposition of a deposit rate floor of a maximum four percentage points below the prevailing Central Bank Rate (CBR).