Bank earnings dip to lowest levels since January owing to interest rates cap
By Patrick Alushula | December 17th 2016
The move to cap interest rates on loans has reduced bank profits before tax for the month of October. According to the economic indicators update prepared by the Central Bank of Kenya (CBK) for October, Sh9.3 billion was the lowest earning since January.
Profitability declined for the fourth straight month since the year high Sh15.6 billion in June.
Month-on-month, the gross profit posted in October was down by 14.7 per cent compared to Sh10.9 billion posted in September. However, when compared cumulatively to October last year, it rose by 6.5 per cent. In a note on the performance, Standard Investment Bank (SIB) analysts predicts lower profits for banks.
“October was the first full month the sector operated under the new interest capping law. In our view, the decline in profit before tax points to weak future earnings on the back of declined net interest earnings,” noted SIB. Though most banks are targeting volume growth on loans to help compensate for the loss in net interest income, SIB analysts said they were not confident that high volume growth would be achieved.
CBK data showed that the loan book remained subdued for most parts of the year, rising by just 2.2 per cent year-on-year to Sh2.29 trillion cumulatively. Cheap credit is yet to excite borrowers. SIB analysts indicated that in October, gross loans grew by just one per cent as the loan book deteriorated.
Loan book quality declined as non-performing loans ratio closed the month at 9.3 per cent from 9.1 per cent in September. In October last year, it was at 5.7 per cent. According to SIB, the slow loan book growth will persist.
“With the law essentially limiting a bank’s capability to price in risk, we believe banks are likely to be more stringent on lending standards or opt for shorter term loans,” said SIB.
The onset of capped cost of credit has seen banks react differently. While some have announced staff cuts, others are trying to play more in the digital space as well as target new segments like SMEs. Though this may offer some reprieve, SIB notes that it may not be enough to compensate the lost net interest income.
With most of the transactions on alternative channels being of low value, SIB believes an increase in charges to beef up non-interest income will discourage customers. Year-on-year, deposits performed better, rising by 6.1 per cent. However, comparing September to October, they dropped by 0.9 per cent. In the process, the sector’s liquidity improved to 43.6 per cent from 36.4 per cent in October 2015.
According Faith Waitherero, a SIB analyst on banking sector, while CBK says that liquidity is no longer skewed to tier I and II banks, its data negates that position. “CBK data shows that reverse repos since last year October have been very high, meaning there are banks still borrowing from CBK. Activity on interbank lending has reduced, meaning banks are not comfortable lending to each other,” she said.
Lower tier banks
Ms Waitherero believes lower tier banks will face a strain on deposits since corporates are now more concerned about the safety of their deposits as well as putting money where they can get the best returns. “There is no longer competition for deposits in terms of rates. It does not make sense to risk deposits in a much smaller bank yet you are going to get the same return as from high tier banks,” said Waitherero.
With the cap, the room for negotiating with corporates on which return to give them for using their money has narrowed. Initially, lower tier banks could lure corporates with about 14 per cent return on deposits to compete with tier I lenders who were offering about five per cent. This therefore helped smaller banks to get deposits.
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