London-based Financial Times newspaper says in its 2018 report that Kenya’s three largest lenders, KCB #ticker:KCB , Equity Bank #ticker:EQTY and Co-operative Bank #ticker:COOP are among the world’s top 20 in terms of return on assets (RoA).
RoA is a measure of a company’s profits against its total assets, and is used to measure how effectively a firm is utilising its assets to generate income.
The Kenyan banks have, however, ranked low in the overall Top 1,000 Banks of the World 2018 report, coming in at positions 799 (Equity), 809 (KCB) and 951 (Co-operative Bank).
Top Kenyan banks have continued to outperform their global peers’ profitability, even as they push for the repeal of the law that caps interest rates, a newly released global banking report says.
London-based Financial Times newspaper says in its 2018 report that Kenya’s three largest lenders, KCB #ticker:KCB , Equity Bank #ticker:EQTY and Co-operative Bank #ticker:COOP are among the world’s top 20 in terms of return on assets (RoA).
RoA is a measure of a company’s profits against its total assets, and is used to measure how effectively a firm is utilising its assets to generate income.
The Kenyan banks have, however, ranked low in the overall Top 1,000 Banks of the World 2018 report, coming in at positions 799 (Equity), 809 (KCB) and 951 (Co-operative Bank).
The Banker 2018 report has ranked the lenders on the basis of size, growth and profitability. Equity Bank made it to position 11 of the profitability list with a 5.3 per cent RoA, while KCB is the world’s 14th most profitable bank with a 4.5 per cent RoA, according the survey.
Co-operative Bank clocked in at position 17 with a RoA of 4.24 per cent. The Kenyan lenders’ high level profitability particularly stands out because their peers in the bottom quarter of the overall global ranking — banks that have tier one capital of less than Sh100 billion — have modest returns of between 0.2 and two per cent on assets, indicating that the Kenyan banks are outperforming their peers globally. Overall, the Kenyan banking industry had an average return on assets of 2.7 per cent in 2017, according to the latest central bank data.
NIC Securities analyst Bill Oloo said the performance of Kenyan banks is driven by the fact that they have been able to align their operations with the rate cap environment. Before the rate caps, the Kenyan lenders largely charged high interest rates and paid low deposit rates to generate the high RoAs.
Non-funded income from new innovations such as agency and mobile banking also helped push profitability on the local front. Mr Oloo, however, reckons that once the cap kicked in, the banks have been able to maintain healthy profitability by taking advantage of non-funded income and earnings from government securities.
The lenders have also been aggressively cutting costs by automating their functions and shrinking their payrolls. Most have also benefited from the new IFRS 9 rules that have helped cut loan loss provisions.
“Post 2017, we note that the generally good asset quality (particularly of the big banks) helped them post lower loan loss provisions than their peers,” said Mr Oloo.
Kenya’s parliament recently removed the floor on interest-earning deposits, which was previously set at 70 per cent of the prevailing CBR – effectively cutting the cost of funds and allowing the banks some room to enjoy wider spreads.
Mr Oloo said he expects small banks to benefit more from this change of regulation than the big ones. “While the repeal of the deposit floor is going to ease a bit of pressure on the cost of funds, I think the big banks are going to be largely unaffected as they have a lower proportion of term deposits,” he said.
The cap on interest chargeable on customer loans, however, remains in force, meaning banks are likely to continue their preference for lending to government in the near term. Large banks have been able to mobilise deposits more cheaply compared to their smaller ones, and to lend the government more cash thus cushioning themselves better against the lower customer loan rates.
Dyer & Bair Investment Bank head of research Linet Muriungi said the fact that 20 per cent of Kenya’s licensed commercial banks control a combined loan book market-share of more than 80 per cent means the landscape is skewed and Tier II and III space highly fragmented.
“Additionally, with the lowest cost of funds, the largest customer base, highest deposit stickiness, best customer mix and strong capital adequacy positions, Tier I banks organically retain their bargaining power, hence the high returns,” she said.
Bank filings for the half year ended June 2018 show that government treasury holdings shot up to Sh1.114 trillion from Sh998 billion in June 2017. Net earnings have also effectively recovered to where they stood before the rate cap (June 2016), clawing back the 2017 erosion.
Latest regulatory reporting show that the majority of the lenders (30 banks out of 39) earned a net profit in the period as opposed to the nine that made losses.
Kenyan banks collectively reported Sh58.6 billion in net profits in the six to months June this year, a 12.7 per cent growth over the same period in 2017 when they earned Sh52 billion. In the first half of 2016, the banks reported total net profits of Sh58.6 billion.
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