How top Kenyan banks retained profits under interest rate caps

Top Kenyan banks retained profits against the stay of the depressive interest rate caps in the last three years by reigning on costs to widen the margin for higher earnings.

An investor note by the global credit rating agency, Moody’s, at the end of last week opens the door to reveal the continued growth in earnings by the local lenders against the tide of held down interest-earning scope.

According to the update which analyses the performance of three tier 1 lenders including Equity, KCB and Co-operative, Kenyan banks edged the hold on rates by maintaining favourable cost to income ratios and lower loan-loss provisioning costs to better the performance of peers in Nigeria.

Further, the domestic banking outfits hold higher net interest margins (NIMS) from servicing high-margin retail clients such as small and medium enterprises (SMEs).

Combined, the three banks score an average cost to income ratio (CIR) of 49 percent from the past four years while holding a weighted net income return of 3.7 percent over definite assets in the period.

In effect, the banks are essentially spending a mere 49 cents for every shilling in income earned to mirror the attained efficiency.

At the same time, the lenders have pushed the earnings envelope through non-interest funded income (NFI) means which encompass higher interest fees and commissions from the disbursement of retail banking products.

Moody’s attributes the strengthened position in the sector’s income growth to the deep penetration of financial services in the country with Kenya sitting at the helm of driving financial inclusion on the continent.

“Kenyan bank’s stronger net interest margins are, to a large extent, a result of high financial inclusion where more than 80 percent of the adult population has some access to financial services,” read part of the note.

The increase in NFI is meanwhile attributable to the high asset turnover for local banking products with multiple loans being disbursed each year to earn a fee each time.

The better margins are enhanced by lower loan-loss provisioning costs with the three banks holding a low 0.9 percent of loan loss provisions to gross loans.

Of the average Ksh.319 billion worth of disbursed loans per lender as of March 31, 2019, non-performing loans account for a lesser 7.2 percent of the mean loan book to reflect on the strengthened asset quality.

At the backend of the quality balance sheets by local banks is ongoing investments into digitization to optimize the lending business through the targeting of even lower costs to income over the medium term.

Weak link

The grand investment into technology is however part of the lenders key frailties as the expenditure leads to higher amortization and depreciation costs.

Higher retail overhead costs are however the greatest undoing for Kenyan banks as mirrored in higher cost to assets ratios which averaged at 5.5 percent between 2015 and 2018.

“This reflects the cost intensive nature of Kenyan banks operations, given both their larger retail customer bases that require high numbers of staff and their recent investments in technology,” the note adds.

Staff costs make for the greatest expense representing 45 percent of total operating costs or an equivalent 2.3 percent of assets.

On average, the sector’s operating costs have grown by 0.4 percent since 2015 while the peer industry in Nigeria register lower costs year over year.

The higher remuneration costs have informed the move towards the rationalization of workforces’ by the majority of banks under the depressive stay of interest rate caps which served to engage the handbrake on the lenders earnings.

According to the Kenya Banker’s Association (KBA), the stay of interest caps saw off the shipping out of an estimated 5000 jobs from the industry.

The recent lifting of the interest capping law is however expected to result in the gradual increase in net interest margins to see even higher earnings by banks.