Drop in loan incomes stifles growth in banks

Nairobi Securities Exchange Photo:Courtesy

Banks will have to create new non-interest income streams if they have to enjoy growth in profits.

Trading for the first six months of the year in an environment punctuated by lack of free hand in pricing customer risk and the piling bad loans have put the brakes on what used to be the norm - huge profits.

All the banks listed on the Nairobi Securities Exchange (NSE) saw their combined profits drop by 14 per cent as they lost Sh18.2 billion in interest on loans and advances to customers.

Unlike in the 2016 half-year when interest on loans and advances was Sh117.5 billion, the interest rate cap that compelled banks to lower their pricing of loans knocked down their income to Sh99.3 billion.

The law capping interest rates at no more than four per cent above the Central Bank benchmark was effected in September last year.

Only Barclays Bank of Kenya, with a loan book of Sh163.8 billion, managed to grow its interest from loans and advances. That was by 3.3 per cent, or Sh309.3 million, to Sh10.5 billion.

Banks are now turning focus on trimming their workforce and deepening their digital products to boost efficiency.

At least nine lenders have announced job cuts in efforts to protect profits. KCB is cutting at least 500 jobs to save at least Sh2 billion per year while Barclay is expected to cut at least 130 jobs.

Bank of Africa, National Bank of Kenya, Sidian Bank, Family Bank, First Community Bank, Standard Chartered Bank and Ecobank have also announced staff cuts.

The sector, through its lobby group, Kenya Bankers Association, and individual chief executives, maintain that the cap was ill-founded.

National Treasury and Central Bank of Kenya, on the other hand, say they are still studying the impact of the cap even though they are on record opposing the amendment prior to it being passed by Parliament.

MOST PROFITABLE

“I believe National Treasury and CBK are now lobbying more than us because they have seen the impact on the economy. We hope by next year there will be some amendments to the law,” said Equity Bank boss James Mwangi as he announced half-year results.

Cumulatively, the 11 banks that include eight of Kenya’s top ten lost Sh6.6 billion when the 2016 half-year profits of Sh46.8 billion are compared to the first half of the current year (Sh40.2 billion).

Kenya Commercial Bank (KCB) remains the most profitable lender despite profits falling by 1.43 per cent to Sh9.6 billion. With Equity Bank’s bottom line dropping by 12.5 per cent, KCB has opened a profit gap of Sh1.65 billion. By half-year 2016, the gap was Sh654 million.

Equity Bank, whose loan book dropped for the third time in a row, suffered a 37.4 per cent dip in interest income from loans and advances. While in the first six months of 2016 interest income was Sh19.2 million, it dropped to Sh12 million in the half-year under.

State-owned National Bank of Kenya suffered a 55 per cent drop in profits to Sh149.3 million as interest income on loans and advances more than halved (55 per cent), showing the significance of the rate cap.

Standard Chartered Bank announced a 36 per cent drop in net profit to Sh3.2 billion as interest income on loans and advances fell by 11 per cent. The bank’s liquidity ratio is at 69 per cent, more than three times the minimum ratio of 20 per cent and the lender is keen to offload Sh10 billion in unsecured loans.

Housing Finance Bank’s earnings fell the most, by 73 per cent, to Sh167.2 million even as interest income on loans dropped by Sh660 million.

“The drop in our performance is as a result of the prevailing impact of interest rate capping law and unfavourable macroeconomic environment that resulted in a significant drop in interest-related income and an increase in interest-related expense,” said HF Group Managing Director Frank Ireri.

Other lenders — Diamond Trust Bank, I&M, NIC, Stanbic and Cooperative — all recorded a drop in profits.

Last month, Cooperative Bank said it had received regulatory approval to enter into leasing joint venture with a South African firm in a move to diversify its income.

The lender will partner with Super Group in exploration, infrastructure, manufacturing, construction, transport and ICT leasing.

LEASING BUSINESS

“Co-operative Bank has received regulatory approval from the Central Bank of Kenya to enter into a leasing business joint venture with Super Group Limited, an established global leader in leasing business based in South Africa,” said Cooperative Bank Group Managing Director Gideon Muriuki when releasing half-year financial results on August 17.

Although the lender increased loans during the period under review by 14.2 per cent, interest on loans and advances declined by nine per cent. “The group has put in place strategies intended at sustaining long-term profitability, with current challenges in the operating environment being mitigated by the benefits arising from the successful execution of the ‘Soaring Eagle’ transformation project,” said Mr Muriuki.