Central Bank Asks Parliament for Time to Compel Banks to Lower Interest Rates

By Soko Directory Team / Published February 22, 2016 | 7:37 am

During the week, the market was on an upward trend with NASI, NSE 20 and NSE 25 gaining by 0.1%, 1.2% and 0.5% respectively. This was on the back of gains in EABL, Safaricom and BAT that rose 0.4%, 0.3% and 0.3%, respectively. Safaricom and KCB were the top movers accounting for 42.4% of the trades during the week. On a YTD basis, the three indices are down 3.4%, 5.1%, and 2.8%, respectively, and from the February 2015 peak to date, NASI and NSE 20 are down 20.7% and 30.3%, respectively.

Equities turnover fell by 32% during the week to Kshs 1.9 bn from Kshs 2.8 bn the previous week. Foreign investors were net sellers for the second straight week with their participation rising to 69.6% from 66.8% last week.

The market is currently trading at a price to earnings (PE) ratio of 12.4x versus a historical average of 13.8x, and with a dividend yield of 4.2% versus a historical average of 3.3%. The charts below indicate the historical PE and dividend yields of the market.

The Central Bank of Kenya (CBK) has asked Parliament to give it time to compel banks to lower their interest rates instead of imposing caps on lending rates through the Central Bank of Kenya (Amendment) Bill 2015. Parliament had proposed to cap interest rates at 5% above the Central Bank Rate (CBR), which is currently at 11.5%. The CBK argued that the law, if passed, will encourage an informal system where banks will abandon risky loans thereby denying SMEs crucial funds to spur economic growth. In a bid to increase market transparency, the CBK recently published the lending rates of each commercial bank: Central Bank publication of average lending rates with the averages as shown;

The average lending rate as at Dec 2015 stood at 18.2%, which is 6.7% above the CBR. Should parliament adopt the proposal all interest rates will be capped at 16.5%, greatly reducing the net interest margins earned by commercial banks, assuming that deposit rates shall remain unchanged. Standard Chartered Bank had the highest increase in the lending rate over the 6 months but its rate still remains lower than that of I&M Bank and Equity Bank. Barclays is the only listed lender to have reduced its lending rate during the six months, mainly because of the average decline in business loans by 3.8% as the bank increasingly shifts from corporate business to target the growing SME sector.

Our view is that the increased transparency and reporting initiative by CBK is positive for the financial sector; as it will make information more available to the consumer and transparency improves market efficiency and pricing. However, we concur with CBK’s view that legislating rates will be bad for the economy. There are borrowers whose riskiness can only warrant loaning them at high rates, say 20%. The high rate compensates for their riskiness. Making it illegal not to give such a loan would reduce the amount of borrowing in the market, deny access to loans to the risky borrowers, which in turn can lead to a lot of businesses and individuals not getting access to funding to grow their businesses.

Barclays Bank of Kenya plans to start agency banking in March, which will make it the first international lender to embrace the model. This signals plans by the bank, which is largely viewed as a corporate lender to move into the retail market that is currently dominated by Equity Bank. Banks have taken up the model to boost efficiency resulting from savings associated with fixed costs of opening and maintaining a new branch. As at September last year, 17 commercial banks had contracted 39,871 agents who conducted over 193.4 mn transactions that were valued at Kshs 1 tn. With the increase in transactions processed by agents expected to continue, we view this as a positive move for the bank as it seeks to tap into the retail market. The agency-banking model, pioneered by Equity Bank, has changed the banking sector landscape and banks like Barclays have no option but to follow to get deposit growth.

Kenya Airways has signed up an American advisory firm PJT Partners to restructure its balance sheet and help it seek approximately Kshs 60 bn in long-term capital in the next six to nine months. The airline’s long and short term loans grew to Kshs 105 bn and Kshs 52 bn, respectively for the six months to September as it posted a net loss of Kshs 10.95 bn in the period. The airline has already taken a Kshs 4.2 bn bailout loan from the Treasury and another Kshs 20 bn from Afrexim Bank in order to keep its operations afloat. In our view, restructuring, financing and other turnaround strategies will help the company improve its cash flow position. However, the financial position of the company may make it difficult to raise the required funds.

See full Cytonn Weekly Report here.

About Soko Directory Team

Soko Directory is a Financial and Markets digital portal that tracks brands, listed firms on the NSE, SMEs and trend setters in the markets eco-system.Find us on Facebook: facebook.com/SokoDirectory and on Twitter: twitter.com/SokoDirectory

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