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Bank stocks gain from interest rate cap repeal

NEWS
By Macharia Kamau | November 9th 2019

Share prices of local banks may rise following the scrapping of the law that had capped interest rates on loans.

Co-operative, Equity and KCB banks are among those whose shares are expected to post substantial increases as investors start focusing on the sector, which decried the impact of the capping of interest rates that resulted in the slow growth of their loan books.

The Finance Bill, which contains clauses scrapping the interest rate capping rules, was assented by President Uhuru Kenyatta on Thursday paving way for expensive bank loans.

According to an analysis by Renaissance Capital, Co-op Bank’s shares are projected to rise by the biggest margin in the coming weeks, going up 36.1 per cent to achieve a target price of Sh21.40. Equity Bank’s share has been projected to go up 21.4 per cent to hit Sh58.30 while KCB is expected to rise by 17.6 per cent to stand at Sh56.50 per share.

The shares of banks listed at the Nairobi Securities Exchange (NSE) have been going up this week following the development.

Investors expect stronger growth by banks following the law review that will now see banks set their own lending rates. The movement has resulted in an increase of NSE’s market capitalisation to Sh2.53 trillion, the highest since last year August.

Parliamentarians had initially rejected Treasury’s proposal to remove the rate caps but the President returned the Bill to Parliament with a memorandum on how the law was having a toll on the economy.

While the MPs did not pass the Bill on Tuesday, they did not shoot it down, with many failing to turn up in Parliament.

When it was put to vote, it could not garner the required 233 MPs needed to shoot down the reservations that the President had.

“The impact on the banking sector will be positive, it should result in higher margins and acceleration of asset growth, which should translate to stronger earnings growth and profitability,” said Ronak Gadhia, Director of EFG Hermes Sub-Saharan Banks.

“The acceleration of revenue growth may also provide room for banks to write-off some of their legacy non-performing loans. Increase in credit growth will also be positive for the economy, especially if the credit is directed to the small and medium enterprise segment.”

Local banks said while they would hike the cost of loans, they were unlikely to hit pre-capping era, where loans were charged interest rates as high as 30 per cent.

KCB, which made comments after MPs failed to raise the numbers required to overturn the President’s memo, noted that risky borrowers would see interest rates go up to 16 per cent, against the 13 per cent, which was the maximum when rate caps were in place.

The bank noted that the regime where banks advanced credit at upwards of 20 per cent is ‘long gone’.

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