Kenya: Banks boast impressive full year growth, buoyed by loan demand and rate hikes

By Herald Aloo
Posted on Thursday, 8 September 2022 11:14

Kenya Central Bank Governor Patrick Njoroge displays the newly designed Kenyan shilling bank notes during a news conference at the Central Bank in Nairobi, Kenya, June 3, 2019. REUTERS/Baz Ratner

Nearly all of Kenya’s commercial banks recorded an increase in net profit in their half year results ending June 2022 compared to last year, defying a difficult economic environment that has been marred by prolonged election jitters and the pandemic.

Tier-one banks such as Equity Group witnessed a 36% net profit growth to KSh24.4bn ($202m), meaning the lender earned roughly KSh135.6m every day, including weekends, across the six months to June 2022.

Others like Kenya Commercial Bank (KCB), Co-operative bank, Absa bank Kenya, and NCBA Group also had their earnings surge significantly by 28.4%, 45%,  13%  and 11%, respectively, in their half year trading. Most banks attribute revenue surge to, among other things,  increased lending and growth in interest income.

According to experts, the stable banking sector as pointed by the impressive performance signal that Kenyan banks could hit new earning records after full disclosure by the end year as they propel economic development and recovery.

“Nothing drastic will change for banks to make a loss by the end of the year. If you look from the quarter two results, net profit in the banking sector was 19%,” says George Bodo, Banking sector analyst. “That means the momentum of the profit is likely to be maintained.”

Welcome relief

Most industries have witnessed significant business growth starting last year, highlighting a recovery from a mix of slowdown caused by the pandemic and global tensions. The end of the prolonged political season will also add a relief to the country’s business community and household.

“The possible growth in revenue is because of the greenlight to risk pricing which banks could not do in the past five years. The election cycle is also over and economic activities should be back,” says Bodo.

Surging interest rates on fixed deposit accounts, which hit a 2-year high of 6.74% as of July, signals that banks are actively sourcing funds to finance their lending activities and increase economic activity.

The only way to stimulate production is to create a stimulus towards production. The first is productivity gains in the existing production sector. We will be focusing on financing that (agri-processing and manufacturing)  a lot so that our businesses can expand.

Fixed deposits, mainly dominated by rich individuals and firms saving millions of shillings, can be locked up for a longer period than in savings accounts. This, plus the withholding of interim dividend payments in the half year by most banks, will help banks retain capital reserves as they invest in the latter months of the year.

Credit needed

Kenya’s economy is in dire need of funds and money circulation, especially among traders and manufacturers, who are banking on loans to bridge financial shortfalls partly occasioned by the escalating import bills and weakening local currency.

This happens as households’ purchasing power gets eroded by the high inflation which soared further in August to a 5-year high of 8.5%. Banks remain keen to invest in the economy to stave off the ballooning cost of production that is eating up manufacturer’s working capital.

“The only way to stimulate production is to create a stimulus towards production. The first is productivity gains in the existing production sector. We will be focusing on financing that (agri-processing and manufacturing)  a lot so that our businesses can expand,” says Equity Group Managing Director and CEO James Mwangi.

The latest financial stability report by the Central Bank of Kenya (CBK) shows that the trade sector tops the borrowing craze,  accounting for 17.1% of the industry’s loan as of June 2022. Manufacturing accounts for 15.2% with households taking 14.9% of the loans.

Risk-based lending

However, businesses and households are specifically feeling the brunt of the risk-based pricing model, which has increased lending rates in the second quarter of the year hence uplifting the banks revenue growth.

Majority of the banks have adopted this pricing model but only a few, including Absa and Equity, have publicly declared getting approval from the CBK. Ecobank, for instance, has revised its overdraft facility for businesses upwards to a high of 16.8% in June from 12% three months earlier.

Commercial bank’s lending to the private sector has more than doubled  this year for the first time in about five years, and experts are not anticipating any slowdown in borrowing in the second half of the year despite interest rates hike.

“Pricing has always been high for small businesses relying on digital loaning apps. The high rates by banks might not stop them  from borrowing,” says Bodo.

The upward tick in the cost of loans coincides with the increase in the yields of risk-free government securities, something that continues to attract commercial banks.

Short term 91-day treasury bills, for instance, had an average 8.86% interest rate as of 5 September 2022, an increase from 6.89% in September 2021. Investment in government securities is expected to subside as most banks now adopt risk based lending that has been under freeze in the past five years.

Kenya Bankers Association (KBA) however warned banks last July that their high appetite for government paper is exposing them to sovereign debt and derail private sector credit growth.

KCB Bank, which is among institutions that have raised their loan rates in recent months, stated that its interest income was mainly driven by a 31.5% rise in income from the government securities while Cooperative Bank’s investment in state securities hiked to KSh183.2bn.

Understand Africa's tomorrow... today

We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.

View subscription options