Kenyan banks record Sh45 billion loss in one day

KBA chief executive Habil Olaka (centre) addressing journalists yesterday. With him are Nuru Mugambi, KBA Director of Communications (left) and Jared Osoro, KBA Director of Research. [PHOTO: WILBERFORCE OKWIRI/Standard]

Listed banks lost more than Sh45 billion from their cumulative worth within hours of a new era in banking where interest rates are regulated.

Panicky investors rushed to sell their shares with supply outstripping demand, as the impact of President Uhuru Kenyatta's decision began to sink in.

Mohamed Wehliye, a top banker and financial columnist, attributed the fall in banks' valuations to the investors sentiment about the policy direction set by the new law.

"Markets are driven by investor sentiments. Policy initiatives announcements may either have negative or positive impact," Mr Wehliye said yesterday as the meltdown on the banking stocks started.

Capping of interest rates is expected to hit the earnings of the banks, which have for long been making high profits at the expense of borrowers.

James Mureu is among the millions of Kenyans who supported regulation of lending rates.

"The banks must reduce their appetite for the customers' money," said Mr Mureu, a former banker at the Central Bank of Kenya.

Most Kenyans were, however, excited about the new laws, amid concerns that one of the major lenders had suspended issuance of unsecured loans.

Analysts at the Standard Investment Bank (Sib) projected that the new laws will take effect in about three weeks, to allow for the formulation of the enacting guidelines, which will be drafted by National Treasury Cabinet Secretary Henry Rotich.

"We expect further price falls as investors continue to digest the news, and understand the full extent of impact of the new law on earnings," said Sib analysts.

Sib projections suggest further devaluation from yesterday's Sh45.5 billion, which happened on the first day of trading, after the enactment of the new law capping interest rates.

It would turn out to be the biggest loss in a single day for the investors in the Nairobi Stock Exchange.

All of the 11 listed banks closed in the red on the worst day of trading for the financial sector for more than half a decade with analysts stating that the situation was likely to get worse.

Diamond Trust, Co-operative and I&M banks led the bear run with 10.7 and 9.8 per cent respectively wiped off the value of the counters.

Barclays, KCB, CFC, NIC and Equity banks also saw their share price fall by an average of eight per cent. Housing Finance, National Bank of Kenya and Standard Chartered banks recorded the least reduction losing 3.44, 2.78 and1.45 of their share price respectively as at close of trading.

"This was expected and investors are logically moving their capital to better yielding equities," stated a financial analyst who requested anonymity.

Mr Kenyatta assented the Banking (Amendment) Bill, 2015, on Wednesday despite spirited lobbying from the banking sector to have him refer the bill back to Parliament.

The decision caught many investors by surprise.

Interest income is the largest contributor to revenues for the banking sector. According to data from Central Bank of Kenya, Kenyan banks made a total of Sh279 billion in interest levied on loans and advances in 2015.

Over the years, commercial banks' interest income levied on loans has more than tripled from Sh104 billion made in 2010, prompting calls from Parliament to have an interest rate cap introduced.

The banks have stated that they will comply with the new law, pending a directive from the Central Bank of Kenya and Treasury on the implementation of the rate cap on existing and new loan facilities.

"We will comply with the new law but it will not be smooth sailing for the economy," said Habil Olaka, chief executive officer of the Kenya Bankers Association.

Financial analysts have cautioned that the move will constrain investments leading to possible job losses and depressed growth.

"This was a populist decision and history shows that populist policies that go against the grain of the market have more adverse impacts to the economy than the suggested gains," said an analyst with an investment bank in Nairobi.