Brace for lower returns on bank shares, warns CBK Governor Njoroge

Central Bank of Kenya Governor, Dr. Patrick Njoroge.
Central Bank of Kenya (CBK) Governor Patrick Njoroge has told bank shareholders to expect lower returns on their investments.

Speaking on Monday during the launch of a regional economic update, Dr Njoroge said this would guarantee cheaper credit as the country prepares for the repeal of the law capping interest rates.

“Bank shareholders should be accepting more of lower returns. Return to equity needs to come down. It has already started going down,” he said during the launch of the International Monetary Fund (IMF) regional outlook for Sub-Saharan Africa.

Even with the rate cap in place, banks have still been able to make increasing profits, with most of them using technology to reduce costs of operation, lending more to the public sector and cashing in on non-funded income.

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As of July, bank profitability surged by 12.5 per cent with lenders making a combined Sh99 billion in profit before tax compared to Sh88 billion in the same period last year.

Shares traded

Bank shares have rallied after President Uhuru Kenyatta’s directive to Parliament to amend the Finance Bill, 2019 to remove the rate cap. The banking sector had shares worth Sh2 billion transacted last week, which accounted for 53.31 per cent of the traded value.

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Equity Group Holdings was the week’s main feature with 39.4 million shares valued at Sh1.5 billion changing hands at between Sh38 and Sh39.95.

KCB Group moved nine million shares valued at Sh408 million and closed the week at Sh44.10.

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Investment bank EFG Hermes projected 18 per cent growth in earnings for the period between 2019 and 2021, the highest since 2015, after President Kenyatta’s turnaround on the law that he approved three years ago.

The National Assembly needs to marshal 233 lawmakers to overturn the Head of State’s memorandum.

A report by the IMF noted that at the onset of the controls, interest rate spreads - the difference between interest paid on deposits and that charged on loans - was generally on a decline, which was in line with Kenya’s peers selected from a group of 53 lower-middle-income countries.

“However, the profitability of Kenyan banks, as measured by the return on equity, remained above the 75th percentile of the lower-middle-income countries,” said the report.

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Central Bank of KenyaPatrick NjorogeCBK