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Big banks suffer biggest blow in interest rates cap

An outlet with various agency banking counters on Club Road in Nakuru. PHOTO | SULEIMAN MBATIAH | NMG
An outlet with various agency banking counters on Club Road in Nakuru. PHOTO | SULEIMAN MBATIAH | NMG 

Big banks suffered the biggest hit from last year’s interest rate caps, which slashed their profit by a larger margin compared to their small and mid-tier rivals, third quarter financial reports released by the lenders show.

The reports, which give a full nine-month comparison of banks’ performance before and after the interest rates cut, also reveal that banks continued to load transaction charges on their customers to cushion their profit margins.

The seven tier-one lenders that have so far reported their nine-month financials have collectively recorded a 6.7 per cent decline in net profit from Sh61.8 billion to Sh57.6 billion, the banking sector reports analysed by the Business Daily show.

This is compared to 10 tier-two and tier-three banks which have reported 0.6 per cent growth in their combined profit to Sh5.95 billion, defying the rate cap shock.

Small lenders doing better

The sector analysis also shows that the smaller banks have outperformed their larger peers in growing their transaction-based income, pushing it higher by 14 per cent year-on-year compared to 11 per cent for their tier-one peers.

“The lower-tier lenders may have adjusted upwards their fees and commissions in order to mitigate the effects of the rate cap, especially when you consider they do not have the large deposit base of their larger counterparts and thus have limited room to grow their loan books,” said Standard Investment Bank (SIB) head of research Francis Mwangi.

Commercial banks are required to report their performance every three months as per Central Bank of Kenya (CBK) regulations.

The nine-month performance shows the banks have remained profitable despite initial fears that the rate cap would push some into losses.

The law, which became effective in September last year, provides that the banks lend at a maximum of four percentage points above the Central Bank Rate (CBR), and pay to depositors minimum interest of 70 per cent of the CBR.

This has seen them advance loans at a maximum interest rate of 14 per cent for most of the year, from highs of up to 25 per cent before the rates cap.

The performance analysis shows that smaller banks have also reined in their costs, with their interest expenses dropping by 12 per cent in the nine-month period compared to last year. Larger banks, which have a bigger deposit base, have cut this expense by only 3.7 per cent in the same period.

Of the eight tier one banks as per the CBK classification, only Commercial Bank of Africa (CBA) was yet to report its nine-month financials by Friday.

Stanbic #ticker:CFC, which announced a profit rise of 19.71 per cent to Sh3.23 billion, and KCB #ticker:KCB, up 5.03 per cent to Sh15.1 billion, are the only top-tier lenders to have grown their bottom-line in the nine-month period.

Equity Bank #ticker:EQTY, Standard Chartered #ticker:SCBK, Barclays #ticker:BBK, Co-operative Bank #ticker:COOP and Diamond Trust Bank #ticker:DTK have reported net profit declines of 2.9 per cent, 39 per cent, 12 per cent, 9.5 per cent and 3.6 per cent in their nine-month earnings respectively.

Most of the tier-two and tier-three lenders have recorded profit increases, including Credit Bank, Ecobank, Guardian Bank, M-Oriental, Victoria Commercial Bank and Bank of Africa, whose net earnings are up nine per cent, 61 per cent, 73 per cent, 176 per cent, six per cent and 289 per cent respectively.

Earnings hit

Overall, the interest income for banks has taken a hit, with the top-tier lenders recording a decline of 5.2 per cent to Sh189.5 billion, while the rest posted a decline of 9.6 per cent to Sh32.8 billion.

The industry, through its lobby the Kenya Bankers Association, has called for a repeal of the rate cap law, saying it has hurt credit growth to the private sector and is also hurting the financial stability of the banking industry.

Lenders have instead been taking up government securities in preference to lending to customers considered to be risky borrowers.

The Business Daily data shows that lending to the government by all the 17 reporting banks went up by 25.6 per cent or Sh124.9 billion to Sh611.7 billion between September 2016 and September 2017.

CBK governor Patrick Njoroge. FILE PHOTO | NMG

CBK governor Patrick Njoroge. FILE PHOTO | NMG

The CBK has also backed the calls for a review of the rate cap, and is expected to publish the results of a survey on the impact of the rate control soon.

CBK governor Patrick Njoroge at a Friday press briefing said the banking sector had to reform to address the problems that caused the popular law to be enacted in the first place.

“There are certain things that banks need to do. The worst thing that can happen is when the interest rate caps are removed — and it is not so much a question of if but when — banks continue to behave the same way they used to behave in the past. That would be traumatic… and we are therefore pushing them to change, for instance to become better in pricing risk and be more transparent with their customers,” said Dr Njoroge.

Latest CBK statistics show that the credit growth to the private sector still remains low at two per cent in the one year to October, even though it has gone up from 1.7 per cent in September and a low of 1.4 per cent in August.