Kenyan Banks Continue to Record Improved Performance Despite Tough Environment

Following the release of the Q1’2019 financial results, it has been revealed that banks had an improved performance in aggregate as they recorded improved profitability overall.

The results indicate the resilience of the sector in a relatively tough environment.

Kenya Listed Banks recorded a 12.2 percent average increase in core Earnings Per Share (EPS), compared to a growth of 14.4 percent in Q1’2018, with the relatively lower performance attributed to the base effect, as the sector was coming from a relatively poor performance in Q1’2017, which was an 8.6 percent decline.

The sector continued to record an improvement in operating efficiency, as shown by the improvement in the Cost to Income Ratio (CIR) to 53.8 percent from 56.6 percent in Q1’2019.

This indicates that the raft of cost rationalization measures adopted by banks in the onset of the capped interest rate regime have borne fruit.

In line with the Q1’2019 financial results, Cytonn Investments released its Banking Sector Review, which highlighted the performance of the listed banks in Kenya.

In their review, Cytonn Investments noted that the increased emphasis on operating efficiency by banks seems to be bearing fruit, with the listed banking sector’s operating efficiency improving y/y.

This was further supported by a recovery in interest revenue, largely supported by the asset re-allocation to government securities, and increased lending to specific segments.

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“The continued focus on alternative banking channels continues to boost banks’ Non-Funded Income (NFI), as well as reduce the staff and branch expenses”, said Caleb Mugendi, Investment Associate at Cytonn Investments.

According to the review by Cytonn Investments, there are four key drivers in the banking sector, namely: regulation, diversification, consolidation, and asset quality.

With a tighter operating environment, diversification of revenue, cost management, and asset quality management will prove to be the key growth drivers for players in the banking sector.

With the deteriorating asset quality, evidenced by the rising non-performing loans, Cytonn Investments says that it expects banks to continue employing prudent loan disbursement policies, and consequently tighten their credit standards, in order to address these concerns around asset quality.

The tough operating environment has, however, made it hard for the smaller banks that do not serve a niche.

Therefore, as has been the case recently, more consolidation activities are likely to be seen, as larger banks acquire the smaller players in the sector who are constrained in capital, as they seek to grow their market share, penetrate new market segments, and expand their product offerings.

Mergers and strategic partnerships between banks are expected, aimed at creating larger entities with sufficient capital base to pursue growth as well as increase their respective competitive edge and pricing power.

“The residual effect will be a stable sector with well capitalized players able to catalyze economic growth as well as withstand any systemic shocks,” said Ian Kagiri, Investment Analyst at Cytonn Investments.

Read Also: A Look at the General Performance of Kenya’s Listed Banks in 2018