Kenya’s Banking Sector Still Resilient As 2018 Fades Away

The banking sector in Kenya has had an improvement in performance, largely aided by the improving economic conditions and a more conducive operating environment compared to a similar period last year, which was marred by election jitters.

However, the banking sector has been fraught by the deteriorating asset quality brought about by the spillover effects of the challenging operating environment experienced in 2017 and the delayed payments by the Government and the capping of interest rates, which has continued to subdue credit extension to the private sector.

This is according to the weekly report by Cytonn Investments which noted that banks have been allocating even more of the deposits into government securities shown by the strong 17.8 percent y/y growth in government securities allocation.

According to the report, the increased allocation to relatively lower yielding assets has consequently reduced the Net Interest Margin (NIM) Private sector credit growth has remained subdued, coming in at 4.4 percent in October 2018, below the 5-year average of 12.4 percent, further indicating reduced intermediation, which has largely affected the MSMEs who comprise a majority of the private sector.

The real estate firm, however, notes that the sector, in general, has adapted to operate in the tough environment, posting a 16.2 percent increase in core EPS.

“We believe the key factors banks need to consider going forward are asset quality management, continued revenue diversification, efficiency, and downside regulatory compliance risk management, amid tighter regulatory requirements by the CBK,” read part of the report.

NIC Group and HF Group were the only banks that recorded declines in core EPS, with NIC recording a decline of 3.3 percent, and HF recording a decline to a loss per share of 0.9 shillings from core earnings per share of 0.5 shillings in Q3’2017. National Bank recorded the highest growth of 303.2 percent y/y, that was realized after adding back the exceptional items expense of 0.5 billion shillings incurred in Q3’2018.

The sector recorded weaker deposit growth, which came in at 7.4 percent, slower than the 13.8 percent growth recorded in Q3’2017. Despite the slower deposit growth, interest expenses increased by 12.5 percent, indicating banks have been mobilizing expensive deposits, as well as taking up borrowed funds from international financial institutions, thereby driving up the interest expense.

Average loan growth was anemic coming in at 4.2 percent, which was lower than 6.1 percent recorded in Q3’2017, indicating that there was an even slower credit extension in the economy, due to sustained effects of the interest rate cap.

Government securities, on the other hand, recorded a growth of 17.8 percent y/y, which was faster compared to the loans, and faster than 10.3 percent recorded in Q3’2017.

The average Net Interest Margin in the banking sector currently stands at 8.0 percent, down from the 8.5 percent recorded in Q3’2017, despite the Net Interest Income increasing by 3.8 percent y/y. The decline was mainly due to the faster 17.8 percent increase in allocation to relatively lower yielding government securities,

Non-funded Income grew by 5.9 percent y/y, slower than 10.9 percent recorded in Q3’2017. The growth in NFI was weighed down as total fee and commission growth was flat, growing by 0.6%, slower than the 10.5 percent growth recorded in Q3’2017. The growth in fee and commission income continued to be subdued by the slow loan growth, and,

The sector continued to improve on its operational efficiency, with the Cost to Income Ratio (CIR) improving to an average of 56.3 percent from 59.4 percent in Q3’2017, buoyed by an improvement in operating income, which outpaced the operational expenses increments.