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Banks earn Sh152.3bn record profit in 2018

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Central Bank of Kenya. FILE PHOTO | NMG

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Summary

  • A new Central Bank of Kenya (CBK) report shows that the lenders’ earnings increased by 12.3 percent over the Sh135.5 billion profit they made for the year ended December 2017.
  • Last year, CBK twice lowered the maximum interest on loans chargeable on borrowers, indicating that banks have devised ways of beating the interest rate caps.
  • The control on cost of loans was introduced to check what was seen as exploitative interest rates by banks.
  • The thinking at the time was that high cost of loans was suppressing overall economic growth.
  • Last year's growth in profit is the fastest since 2015-2016 when the lenders’ earnings grew by 13.8 percent.

Kenyan banks’ total pre-tax profits hit a record high of Sh152.3 billion last year, surpassing the previous earnings peak reported before the introduction of interest rate controls slightly more than two years ago.

A new Central Bank of Kenya (CBK) report shows that the lenders’ earnings increased by 12.3 percent over the Sh135.5 billion profit they made for the year ended December 2017.

Last year, CBK twice lowered the maximum interest on loans chargeable on borrowers, indicating that banks have devised ways of beating the interest rate caps. The control on cost of loans was introduced to check what was seen as exploitative interest rates by banks. The thinking at the time was that high cost of loans was suppressing overall economic growth.

Last year's growth in profit is the fastest since 2015-2016 when the lenders’ earnings grew by 13.8 percent.

Banks have now more than doubled their combined profits in under one decade, making them one of the most profitable sectors of the economy. The lenders made combine pre-tax profits of Sh73.7 billion in 2010.

Kenya Bankers Association (KBA) chief executive Habil Olaka Monday said he would only comment on the lenders’ performance once all of them have released their annual results.

Banks are by law expected to have released their audited results for 2018 by the end of this month.

“Once all the results are out, full disclosure on the trends will come out. The CBK numbers are summaries and only actual numbers will help us get a full picture,” said Mr Olaka in a phone interview.

Banks have projected an even bigger profit growth this year, going by their chief executives’ predictions in a survey shared with the CBK in January. Many indicated that lending expectations were high despite the interest caps.

“Bank respondents indicated that lending in 2019 was expected to be supported by the stable macroeconomic environment and increased economic activity, which are expected to translate into a higher demand for credit from both firms and households,” said CBK.

The bank CEOs have also pegged their expectations on higher investment appetite by entrepreneurs due to lower interest rates, lower political risk and business opportunities in the ‘Big four’ priority areas.

New business models

Stanbic Bank Holdings became the first lender to release its annual results, which are in synch with the CBK headline numbers. Its net earnings grew by 45.5 percent to Sh6.27 billion supported by growth in both interest and non-interest income. Its net interest income, which chiefly comes from loans and advances to customers, grew by 14 percent to Sh12.13 billion as it expanded its loan book by 12 percent.

The increased income was despite CBK lowering the base lending rate to 9.5 per cent in March then further to nine per cent in July.

Stanbic Bank Kenya CEO Charles Mudiwa said the bank rode on new business models and customer support to achieve growth.

He, however, maintained that the cap should be removed.

“We continue to regularly review and amend our risk appetite in response to changes in our operating environments and manage our exposures responsibly,” said Mr Mudiwa.

Despite such growth, banks have continued to describe the economic environment as “challenging” since 2016 when President Uhuru Kenyatta signed an amendment to the Banking Act, taking away their free hand in pricing loans.

Gross loans for the sector hit Sh2.57 trillion at the end of December, up from Sh2.44 trillion in January last year, showing increased lending. Gross non-performing loans however passed Sh300 billion in April, closing the year at Sh308.8 billion.

The full year results reinforces findings by London-based Financial Times newspaper that said in its 2018 report that Kenya’s top three largest lenders -- KCB, Equity Bank and Co-operative Bank -- are among the world’s top 20 in terms of return on assets (RoA).

RoA is the measure of a company’s profits against its total assets, and is used to gauge how effectively a firm is utilising its assets to generate income.

Equity Bank was ranked 11th on the returns list with a 5.3 percent RoA while KCB was ranked as the world’s 14th most profitable bank with a 4.5 percent RoA.

Co-operative Bank was ranked 17th with a RoA of 4.24 percent.

In the year to December 2018, customers also entrusted banks with additional Sh385.7 billion, pushing total deposits to Sh3.33 trillion, enough money to fund Kenya for about 18 months.

But with Parliament having voted last year in favour of removal of deposit rates cap, CBK says in its January market perception survey that this has lessened the strain on cost of funds for banks.

Between February and October last year, customers have seen a 131 basis point drop in interest paid on deposits. The Kenya National Bureau of Statistics put the rate at 5.7 percent in October from February last year’s 7.01 percent.