Kenya: Rate Cap, Liquidity Crunch Hit Banks' Revenues


 | Source:  The EastAfrican; All Africa

Kenyan banks are struggling to mobilise deposits, which could further dent their profitability amid declining income from loans and advances.

And now, the lenders are looking for cheap funds to lend to the government through Treasury bills and bonds after declaring that households and small businesses were risky after an interest rate cap regime was ushered in in 2016.

A review of the results of a few top banks that have released their 2017 full-year results shows that retail banks performed relatively better in deposit mobilisation compared with the corporate-focused lenders.

Customer deposits

For instance, Kenya Commercial Bank's customer deposits increased 11.5 per cent to $5 billion in 2017, from $4.48 billion the previous year. The regional lender attributed the increase to the continuing "flight to safety" of customers after the collapse of some banks.

Stanbic Bank Kenya's customer deposits increased 25 per cent to $1.53 billion, from $1.21 billion while Barclays Bank of Kenya saw its customer deposits increase by 4.3 per cent to $1.85 billion, from $1.78 billion in the same period in 2016.

Analysts at Standard Investment Bank said on a quarterly basis, the banks registered a $144 million contraction in customer deposits, even though some have maintained their dividend payment policy to appease shareholders.

For KCB, in comparison with the proportion of balance sheet, like the previous year, the additional deposits went to lending, not disproportionately to T-bills, unlike Stanbic and Barclays, which almost closed the lending taps to corporates and SMEs.

"KCB had an impressive performance," said Deepak Dave, an analyst with Riverside Capital.

"The deposit growth was above inflation, and this shows the value of brand in a tough market. Their non-performing loans were kept under control, and the raised deposits at 60 per cent went primarily to new lending, while the rest went to debt repayment and cash placements optimising interest margin."

The bank also saw its interest income from loans and advances dip by $390,000 despite its loan book growing 10 per cent, to close the year at $4.2 billion.

Interest rates cap

An analysis of Stanbic's financial results painted a different picture on a year the interest rates cap hit their bottom line. The bank recorded a rise in deposits but almost all of it was channelled to government paper or interbank lending.

Only group borrowings, and mostly in other countries, went into loan growth.

"For Barclays, the loans-deposits ratio stood at 93 per cent, showing that they've stretched beyond level of prudence to deploy money, with only five per cent growth in deposits, below rate of inflation.

The $100 million rise in deposits matches perfectly to the rise in Treasury bills investment, which is a precise example of issue facing industry given the rate cap: Lend to sovereign, not to market," Mr Dave said.

Barclays Bank's profit after tax fell 6 per cent to $69.2 million from $73.9 million in 2016. Its non-performing loans, a key head ache in the sector also surged to $93.5 million from $87.8 million.

Stanbic Bank saw its net profit drop two per cent to $43 million from $44.2 million while that of KCB remained flat at $190 million, with regional subsidiaries performing below expectation.

"We shrugged off quite a testing business environment across markets. The full effect of the law capping interest rate in Kenya marked by a slow business environment on account of the general election negatively hit businesses and the economy at large," said KCB Group chairman Ngeny Biwott.


KCB's total non-performing loans and advances rose to $323.7 million from $272 million while that of Stanbic Bank increased to $86.9 million from $58.3 million.

"The non-performing loan formation continues to persist. As per the Credit Officer Survey for the quarter ending December 2017, NPL ratio increased "to 10.56 per cent- a 10 year high.

We expect the status quo to remain or worsen in the first half of this year, before a retraction in June," analysts at Standard Investment Bank said.

"Last year was generally a difficult year for business, due to the intense political activity for the better part of the year. Coupled with the impact of interest rate caps, it was a lot more difficult for the financial services industry," said Charles Mudiwa, chief executive of Stanbic Bank Kenya. Read more on All Africa.

Source: All Africa