Capital Markets

Listed companies pile of held cash rises to Sh815bn

Banks and telecommunications operator Safaricom account for the bulk of the Sh72.2 billion increase in retained earnings. PHOTO | FILE | NMG
Banks and telecommunications operator Safaricom account for the bulk of the Sh72.2 billion increase in retained earnings. PHOTO | FILE | NMG 

Public listed companies last year grew the mountain of retained earnings by 10 per cent to Sh815 billion in reaction to tight liquidity in the market with the coming into force of the interest rate capping law and limited investment opportunities in an election year.

Kenya’s economy also slowed down to grow at 4.9 per cent last year compared to 5.9 per cent in 2016 as businesses dealt with the consequences of prolonged drought and political uncertainty that came with the General Election.

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.

Banks and telecommunications operator Safaricom #ticker:SCOM account for the bulk of the Sh72.2 billion increase in retained earnings, reflecting their higher profitability among listed firms.

The lenders cumulatively raised their reserves by Sh43 billion to Sh367.7 billion, while Safaricom’s retained earnings went up by Sh11.2 billion to Sh75.6 billion in the year ended march 2018.

Insurance companies and energy parastatals Kenya Power #ticker:KPLC and KenGen #ticker:KEGN also raised their holdings significantly.

Analysts said banks and insurers were also keeping an eye on possible higher capital requirements this year with the coming into force of the new financial reporting (IFRS) standards that demand higher capitalisation depending on the level of risk a borrower carries.

“It may not be the only reason but this year the financial services firms are looking at the new risk-based capital rules (IFRS),” said Standard Investment Bank head of research Eric Musau.

“The banks may also be thinking that the growth in lending to government may not be sustained in the long term, and would therefore need to leave enough room for lending to the private sector,” he said, adding that listed company shareholders are generally happy with retention of cash “so long as the return on equity is good.”

ABC Capital corporate finance manager Johnson Nderi sees the increase in retained earnings as resulting from level of company profitability, and with it a natural adjustment in cash retained, especially because more companies adopted a more conservative dividend policy last year.

This conservative dividend policy coupled with aggressive cost-cutting measures adopted by many firms — especially in the financial services sector — has seen them retain more money.

Companies also retain earnings as a financial management tool, especially when they are unsure of the direction of interest rates, analysts said.

Power generator KenGen has the biggest pile of retained earnings at Sh148.6 billion, followed by Safaricom.

The telecoms operator released its full-year financial results last week, revealing it made a net profit of Sh55.3 billion and retained its dividend policy of giving shareholders 80 per cent of net profit that amounts to Sh44.1 billion.

The list of companies with significant retained earnings includes Equity Bank at Sh71.5 billion, KCB #ticker:KCB at Sh63.4 billion, Cooperative Bank #ticker:COOP at Sh55.3 billion and Kenya Power at Sh43.1 billion.

The energy parastatals have traditionally held large piles of retained earnings to meet their large capital expenditure needs.

Although KenGen and Kenya Power have equally accumulated large debt stockpiles as they finance their expansion plans, retained earnings have played a significant role in helping augment debt with internally generated revenues.

Latest reports also show that NIC Bank increased its retained earnings by Sh4.8 billion to Sh27.8 billion as it awaits the maturity of a Sh5.5 billion medium-term note in September next year that will require a significant cash outlay to redeem.

Among the insurers, Jubilee Holdings #ticker:JUB and Kenya Re #ticker:KNRE have the largest pool of retained earnings at Sh19.5 billion and Sh20.8 billion respectively, having added Sh3.2 billion and Sh2.5 billion.

Mr Nderi reckons that the decision to hold on to cash is also informed by shifting company financing models, with many increasingly finding it hard to use debt as the preferred instrument.

“We have seen companies that are looking to finance their business differently after turning away from debt,” said Mr Nderi.

Banks have tightened their lending standards due to the rate cap, forcing companies looking for cash to consider other avenues of accessing funds.

Going forward, companies are likely to begin deploying their cash with the expected recovery of the economy following the end of the political standoff that held the country hostage last year.