KCB sees lower return on equity after rate cap

The country’s biggest bank by assets KCB expects its return on equity to drop by four percentage points this year after lending rates were capped, although loans to customers will be ahead of target, its chief executive said.

Last month, the government capped commercial lending rates at 400 basis points above the central bank’s benchmark rate (CBR), now at 10 percent, sending shock waves through the market and driving down bank share prices.

CEO Joshua Oigara said return on equity (ROE) would slip to 21 percent in 2016 from 25 percent in 2015, but said it would still show a strong performance.

“Where (else) do you get that kind of ROE for a financial institution in the world?” he said.

Kenyan lenders enjoy higher ROEs than their counterparts in South Africa and Asia, both with an average of 18 percent, and single figures in Europe and the United States, Oigara said.

The government said banks had enjoyed high profits on the back of excessive lending rates, and had ignored other pleas to rein them in. Experts said capping rates could mean small firms, deemed more risky, would no longer find lenders.

The amendment to the banking act that introduced the rate cap also set the minimum deposit rate for banks at 70 percent of the CBR and Oigara said this would squeeze net interest margins.

Oigara said KCB was offsetting the impact of the rate cap by lending more to its customers, adding that the bank expected to exceed a target of 13 to 14 percent loan growth in 2016.

KCB also plans to raise the share of income from its digital banking business, mainly on mobile phones, to 50-60 percent in five years from less than five percent now, Oigara said.

The group, which also operates in Rwanda, Tanzania, Uganda, Burundi and South Sudan, is increasing capacity on its mobile banking platforms like KCB M-Pesa, operated with telecoms operator Safaricom, to handle more transactions.

The bank will turn its digital banking business into a subsidiary, KCB Fintech, by January.

Small loans issued on mobile phone-based platforms like KCB M-Pesa have gained popularity, with small traders borrowing the equivalent of a few dollars to purchase items to sell, and sometimes repaying the sum by the end of the day from their profits.