Banks profitability heading for the rocks, KBA warns
Growth in earnings by commercial banks will soon grind to a halt under prevailing macro-economic conditions, the Kenya Bankers Association (KBA) has warned.
Though a majority of lenders have continued to churn out a profit under the interest rate capping bottlenecks, KBA terms the underlying growth elements as unsustainable in the long-run.
Commercial banks have embarked on a mix of increased government lending, automation and regional expansion in the intermediating period since the legislation of lending ceilings in September of 2016 to absorb the effects of the lending ceiling.
Even so, the bankers association believes growth fundamentals are unattached to the country’s overall economic prospects to leave profit making on sinking ground.
“The government will reach a point where it is able to manage its fiscal deficit and won’t significantly rely on borrowed funds,” said KBA Chief Executive Officer Habil Olaka.
“On efficiency, you can only cut your fat to a point where you remain with the bone, meaning you can’t cut anymore. Even expansion has a limit and this is not where we would like to go.
According to Mr. Olaka, the resolution to sustainable growth by banks lies largely in the freeing up of credit to the private sector’s small and medium enterprises (SMEs) who make for the bulk of Kenya’s economic output.
While the interest rate cap was originally tailor-made for this very purpose, the regime has failed to propel both private sector credit and savings to end as a stumbling block to economic expansion.
Private sector credit growth has for instance fallen to the low single digits in years’ since the cap’s enactment from an average high of 13.5 percent with commercial bank’s telling of hardships of pricing the risks for businesses at a rate of four percent above the Central Bank Rate (CBR).
At the same-time bigger banks have stepped up their expansion to the region with lenders such as KCB opening up a representative office in Ethiopia in 2016 while its nemesis Equity has most recently put out plans to acquire four banks in Southern Africa from London Securities Exchange (LSE) listed Atlas Mara in a Ksh.10.6 billion share-swap deal.
Cracks in growth sustainability have already began to show including lenders’ paining stakes to grow non-interest funded income (NFI) and a falling return from investing in government securities.
Interest caps have effectively created a substantive level of liquidity for cheaper domestic borrowing by government resulting in thinner yields for commercial banks.
According to data from the Central Bank of Kenya (CBK) the return on a one year treasury bill has fallen to 8.8 percent as at the end of August 2019 from a high 13.6 percent on December 31, 2015.
The return from a 91-day and 182-day government paper has followed a similar trend to correspond with falling yields on longer-tenured government bonds.
Meanwhile, the quest for efficiency by commercial banks has been a tale of two parts defined in greater cost optimization but with an Achilles heel of haphazard NFI growth.
An analysis of financials by three of the largest Kenyan banks by asset base in KCB, Equity and Co-op Bank shows NFI growth at an average 13.2 percent between 2015 and 2018 on business diversification including new revenue streams such as bancassurance.
The Bankers regulator in the CBK has too joined the push towards the free contracting of loans while informing of substantive reforms to negate the return of expensive loans, the primary consumer concern, including the implementation of the Banking Sector Charter.
“What cannot happen is a return to the same old. Our vision is to have a banking sector which works for and with Kenyans. That maybe one of the issues we had before where the banking sector worked for some,” CBK Governor Patrick Njoroge told a news conference in March.
The CBK has too been on the bitter end of the cane with regards to interest capping having seen the dissolving of its monetary stance through the tying up of real economic lending with the CBR.