Despite the high cost of credit and the volatile interest rates, the major players within the mortgage industry still declared double-digit percentage profit, writes ALLAN OLINGO

A look at financial statements of commercial banks that have a mortgage facility shows defiance to harsh economic environment as most of them have posted more than ten per cent growth in pre-tax profit during the six months period ending June 30.

Kenya Commercial Bank (KCB) group emerged as the most profitable lending institution as its half-year pre-tax profit jumped 48 per cent.

The group’s profit before tax (PBT) for the six-month period to June 30 swelled to Sh8.5 billion from Sh5.7 billion in a similar period last year.

“The growth in income reflects higher earnings on our good book as well as increase in business from retail, corporate and mortgage segments,” said Martin Oduor-Otieno, KCB Group Chief Executive.

Banks’ profits

KCB, mortgage book grew to Sh33.7 billion from Sh15.6 billion in 2009, translating to a 40 per cent market share.

“In the past one year, KCB has seen an upsurge in mortgage lending at 49 per cent following the roll out of this product into Rwanda, Uganda and Tanzania,” said Oduor-Otieno.

Similarly, Co-operative Bank group’s pre-tax profit rose 21 per cent to Sh5.01 billion from Sh4.14 billion in a similar period last year helped by a significant expansion in transaction-based income. Barclays Bank of Kenya (BBK), on the other hand, recorded an 18 per cent growth in profit.

The bank’s profit before tax increased to Sh6.31 billion from Sh5.34 billion in a similar period last year while customer deposits fell five per cent to Sh122.48 billion from Sh128.43 billion.

Barclays Managing Director Adan Mohamed attributed the bank’s profitability to growth in income and prudent cost management through investment in technology.

“The commendable results arise from the bank’s ability to continue with its sustainable growth momentum achieved over the years,” said Mohamed.

National Bank of Kenya’s profit declined by 17 per cent to Sh912 million from Sh1.1 billion in a similar period last year over what the management attributed to the high interest rates.

Equity Bank and Standard Chartered earned Sh6.9 billion and Sh6.5 billion respectively from January to June. All these banks are also major players in the mortgage industry.

 

Loans uptake drops

However, even though there has been a rise in profits, it’s also significant to note that there has been a considerable drop in mortgage up takes, especially for stand alone mortgage provider Housing Finance, which reported a 38 per cent drop in mortgage uptake in the same period despite an 11 per cent jump in profits.

Housing Finance Managing Director Frank Ireri said that the drop was occasioned by high cost of funds and increased inflationary pressure that saw potential first-time homebuyers delay taking up loans.

“We have witnessed a drop in mortgage sales as a result of a high interest rates, which mainly affected those entering the mortgage market,” said Ireri.

Housing Finance mortgage interest income grew by 46 per cent to Sh951 million compared to Sh651 million in March last year. It’s loans disbursement levels also raised to Sh2.2 billion from Sh1.9 billion in a similar period  last year.

CBK’s slashed rates

The Central Bank last week moved to stimulate growth with cheaper credit when it cut the Central Bank Rate by 3.5 percentage points to 13 per cent.

“The decision is in line with the recent economic developments that have seen the inflation ease at 6.09 per cent, the lowest since January,” said the Central Bank Governor Njuguna Ndung’u.

The lowest mortgage interest rates stood at 19 per cent in March and highest at 25-30 per cent for direct home purchase, construction finance and land purchase loans.

Last year’s Central Bank Annual Supervision report that was done in collaboration with the World Bank undertook a residential mortgages market survey that provided an update on the size of mortgage portfolio, mortgage loan characteristics and the obstacles to mortgage market development for this year.

Usual suspects

According to the survey, as at December 31 last year, the value of mortgage loan assets outstanding increased from Sh61.4 billion in May 2010 to Sh91.2 billion in December last year, representing a growth of Sh29.8 billion or 48.5 per cent. 

“About 71 per cent of the lending to mortgage market was by five institutions, that is one medium-sized institution (28.3 per cent) and four institutions from the large banks peer group (42.9 per cent). The same institutions dominated the mortgage market based on the 2010 survey,” read the report.

The value of residential mortgages stood at Sh91.2 billion in 2011 comprising of 16,135 mortgage accounts. There were 16,135 mortgage loans in the market in December last year up from 15,049 in May 2010.

Cash high end purchases

“The average mortgage loan size increased from Sh4.1 million in May 2010 to Sh5.7 million in December last year,” read the report adding that the increase may be partly attributed to increase in property prices.

 This also shows that it’s the middle-income earners who are taking up mortgages compared to the high-end purchasers who have preferred buying on cash terms.

According to the report, the interest rates charged on mortgages on average ranged between 13 per cent to 26.7 per cent. However, the average interest rate increased from 14.02 per cent in May 2010 to 20.70 per cent in December last year. 

About 90 per cent of mortgage loans were on variable interest rates basis in  last year as compared to 73 per cent in 2010.

Slump in residential mortgages

“The tendency for institutions to grant mortgage loans on variable interest rate basis may be contributing to slow growth in residential mortgage market in Kenya,” reads the report.

The report predicted that the mortgage market this year will be dampened by increased lending interest rates with borrowers income remaining unchanged and increased cost of materials due to high inflation.

Consequently,  borrowers have adopted a wait and see attitude as they await the outcome of the forthcoming general elections.