By James Anyanzwa

Nairobi,Kenya:Super profits: CBK report shows the pre-tax profit for the banking sector increased by 20.6 per cent to Sh107.9 billion in December 2012 from Sh89.5 billion in December 2011

Small commercial banks in Kenya are facing a bleak future and some may be forced to sell out, merge or undertake massive customer recruitment drive if they are to remain in operation in coming years.

A new report by the Central Bank of Kenya shows that 22 low tier banks have a combined market of 9.5 per cent, a share that is smaller than what one big bank in the country controls. According to Central Bank’s latest Bank Supervision Annual report (2012) six big banks raked in billions of shillings in profits and controlled over 50 per cent of the total market share last year.

These banks pocketed a total of Sh70.67 billion, accounting for 65.5 per cent of the total profits made by the entire banking industry last year. This compares unfavorably with a measly Sh2.15 billion (two per cent) in profit made by 22 small banks and Sh35.06 billion (32.5 per cent) made by 15 mid-sized banks.

According to the report six large banks accounted for 53.7 per cent of the market share for the period ended December 31, 2012, 15 medium banks controlled a market share of 36.8 per cent, leaving 22 small banks with a market share of a paltry 9.5 per cent.

The six big banks also controlled Sh880 billion worth of customer deposits compared with Sh656 billion and Sh171 billion for the medium and small sized banks respectively. The big banks which are categorised based on their level of assets, deposits, capital size, number of deposit accounts and loan accounts also sits on a massive Sh202 billion worth of capital and reserves with mid and small banks controlling Sh126 billion and Sh32 billion of capital and reserves respectively.

According to the report, the pre-tax profit for the banking sector increased by 20.6 per cent to Sh107.9 billion in December 2012 from Sh89.5 billion in December 2011. The growth was largely attributed to income generated by increased loans and advances coupled with regional expansion initiatives. Gross loans grew 11.7 per cent from Sh1.19 trillion in December 2011 to Sh.1.33 trillion in December 2012 due to increased demand for credit by the various economic sectors.

Customer deposits grew 14.8 per cent from Sh1.49 trillion in December 2011 to Sh1.71trillion in December 2012. “The growth was attributed to increased deposit mobilisation by banks as they expanded their outreach and opened new branches to tap new customers. Adoption of the agency banking model also helped banks to upscale their deposit levels,” says the report.

Total net assets increased by 15.3 per cent from Sh2.02 trillion in December 2011 to Sh2.33 trillion in December 2012 with the growth being supported by the increase in loans and advances. Twenty-seven locally owned commercial banks accounted for 62.4 per cent while 13 foreign-owned commercial banks accounted for 33.4 per cent of the sector’s net assets. The report notes that the banking sector supported the various economic sectors through pro¬vision of loans and advances in 2012.

Consolidation

Some of the critical economic sectors that received credit were trade, manufacturing, hotels and restaurants, transport and communication and Agriculture. However the ratio of non-performing loans to gross loans increased from 4.4 per cent in December 2011 to 4.7 per cent in December 2012. The increase in non-performing loans signalled an increase in credit risk, which was largely attributable to high interest rate in the first half of 2012.

“CBK enhanced surveillance on institutions experiencing deteriorating asset quality,” says report. “The banking sector is expected to sustain its growth momentum supported by the increased regional expansion of Kenyan banks and exploitation of the untapped huge domestic potential as the devolved county government system takes effect,” said Fredrick Pere, CBK’s director in-charge of bank supervision department.

It is widely argued that consolidation across Kenyan banks might possibly lead to efficiency and stability gains. According to CBK the total number of commercial banks as at December 2012 stood at 43 with local private commercial banks constituting 62.8 per cent, foreign commercial banks (30.2 per cent) and local public commercial banks (seven per cent).

During a similar period the total asset base for the banking industry stood at Sh2.3 trillion with local private commercial banks controlling 62.4 per cent of the total assets, foreign commercial banks (33.4 per cent) and local public commercial banks (4.2 per cent).

The lenders are under immense pressure to top up their core capital in order to prop up their lending capacity and be able to withstand shocks in times of economic and financial stress. The Kenya Bankers Association (KBA), the industry’s umbrella body, acknowledged that the new regulations on capital adequacy might affect the retention policies of some banks leading to reduced earnings to shareholders.

“This may not be the case for the whole banking industry and possibly the trend may not be related to capital adequacy constraints. However, we know that the new regulations on capital adequacy requiring institutions to build up a buffer of 2.5 per cent in addition to capital for operational and market risk, may affect the retention policies of some banks and this may be felt through reduced payout ratios,” said Habil Olaka, KBA’s chief executive.

“Even though the buffer is meant to be built over time (24 months), most banks will front load the retention to be on the safe side but this may not be the most attractive for the shareholders who have factored in a given dividend payout policy. “ The tight capital adequacy ratios require commercial banks to raise new capital either through debt or equity.

Commercial banks operate from the premise that they have to retain part of the funds available aside for regulatory compliance (capital adequacy) and the excess is what the banks have the flexibility to fund their expansion and on-lend. When the capital requirements go up banks are forced to either increase their retention ratio to build up the capital base or approach the shareholders for further injection of capital.

KBA noted that commercial banks have a 24 month build up period for the new capital and so adequate safeguards are in place to ensure that banks can accommodate the adjustment period. “Even though the buffer is meant to be built over time (24 months), most banks will front load the retention to be on the safe side but this may not be the most attractive for the shareholders who have factored in a given dividend payout policy,” said Olaka.