Kenya’s Banking Sector Weakens but Maintains Resilience in 1H18

The performance of the banking sector for the first quarter of 2018 depicts a weakened but resilient trend.

According to Genghis Capital report, under the new reporting environment (IFRS 9), the 1H18 performance has been solid across the coverage universe with a profit after tax (PAT) growth of 19.1 percent year to year compared to 1H17.

Leading the sector was Stanbic Bank with a PAT growth of 111.8 percent mainly from an 83.3 percent year to year cut in charges of loan provision. The PAT growth in the sector was attributed to a 32.7 percent y/y drop in loan provision charges.

Due to more cautious lending and higher credit profiling standards under IFRS 9, new provisions in 1H18 could have dropped. Still, the inherent subjectivity in the computation of the probability of default in arriving at a loss provision charge is something to be wary about.

During the period under review, the Net Interest Margin (NIM) dropped to 7.6 percent compared to pre-cap 8.5 percent in 1H16. KCB is the only bank that recorded a positive NIM growth (70bps) over this period, while Equity Group’s NIM shrank the most (180bps) reflecting the bank’s risk aversion since rate caps were enacted.

There is, however, an expectation of NIM compression due to the sector’s increased focus on investment to the lower yielding government securities.

Meanwhile, the Cost-to-Income (CTI) ratio is yet to stabilize. In 1H18, CTI has edged up 264bps to 48.4 percent for the banks since the introduction of the interest rate caps due to depressed earnings. Still, the CTI ratio is expected to shift downwards as banks continue to adjust their business models through digitization and cost rationalization measures in a bid to enhance operational efficiency.

The sector also registered a Higher Non-Interest Revenue (NIR) contribution despite the erosion of the sector’s key revenue driver, Net Interest Income (NII). Most banks adjusted their strategies to alternative income businesses and the average income contribution from alternative channels rose to 33.7 percent from 30.4 percent in 1H16.

I&M performed best with NIR contribution rising 1000bps due to the bank’s aggressive campaign from the launch of I&M Karibu – an agency banking which enlisted a majority of previously MobiKash agents – and its Bancassurance agency I&M Insurance Agency Ltd.

As the sector increasingly shift transactions to off-branch channels – mobile, internet and agency banking – the NIR contribution to total income is bound to continue growing.

The trends in the banking sector were largely influenced by the Finance Bill 2018 looking to amend section 33B of Banking Act and the challenging operating environment that began in 4Q15 to name a few.