Barclays, Rival Kenyan Lenders Seen Facing Margin Squeeze

  • Appetite for new loans weakened by rates exceeding 24%
  • Government borrowing has pushed up bank funding costs

Banks in Kenya, East Africa’s largest economy, face reduced lending margins into 2016 as their funding costs rise and an increase in the interest rates charged to customers curtails appetite for fresh loans, ETM Analytics said.

Borrowing by the government in domestic markets to shore up the budget has pushed yields on short-term state debt to more than 22 percent, double the levels in January. That’s prompted banks to increase the rates they ask for commercial loans to 24 percent to 27 percent, reducing demand from customers and increasing the risk of defaults, said Gareth Brickman, an Africa analyst at ETM Analytics NA LLC.

Kenya has 43 commercial banks including local units of Barclays Africa Group Ltd., Standard Chartered Plc, Standard Bank Group Ltd. and Citigroup Inc. While the Central Bank of Kenya has tightened monetary policy to support the local currency and gain price stability, the government has borrowed on the domestic market to plug a 221 billion-shilling ($2.2 billion) finance gap and settle maturing loans, driving up borrowing rates.

Bank margins will “come under pressure if their cost of funding is higher and the higher rates they then have to pass on reduces demand for borrowing,” Stamford, Connecticut-based Brickman said in an e-mailed response to questions. “Higher funding costs imply higher credit risks. The exact impact on loan performance and default risk will vary from bank to bank depending on terms of the loans on their books.”

‘Performance Strained’

The forecast of tighter margins comes two weeks after the central bank assumed control of Imperial Bank Ltd., a closely held lender, because of “unsafe or unsound business conditions.” It was the second bank to be taken over by regulators after Dubai Bank Kenya Ltd. was seized by authorities in August. Kenya’s banking industry is “safe and robust,” the central bank and the Capital Markets Authority said Oct. 13.

Businesses “will not borrow at 24 percent to fund production,” James Mwangi, chief executive officer of Equity Group Holdings Ltd., Kenya’s biggest lender by market value, said Monday. “There is going to be a strain on performance of loan book right across the board.”

Lending rates are likely to remain high through June next year because of the government borrowing, said Francis Mwangi, banking analyst at Standard Investment Bank in Nairobi. “Tier-2 and Tier-3 banks suffer the most during periods of higher lending rates,” he said in a phone intervew.

In its latest auction of 91-day debt on Oct. 22, the Kenyan government sold bills yielding 22.5 percent. The Kenyan shilling has dropped 10.7 percent against the dollar this year as investors avoid riskier assets and amid a slump in earnings from tourism and farming exports.

The Kenya Bankers Association, which has said the closing of Imperial poses no risk to the country’s banking system, predicted that the higher borrowing costs for customers may cause some banks to miss revenue targets.

“There will be pressure on banks’ credit growth -- they may not achieve as much growth as targeted,” Habil Olaka, the association’s CEO, said by phone. “Revenue premised on credit growth will not be achieved once appetite for borrowing is curtailed.” 

Equity Group advanced 2.4 percent to 42 shillings by the close of trading in Nairobi, while Kenya Commercial Bank Ltd. fell 1.2 percent to 40.50 shillings and Barclays Bank of Kenya Ltd. gained 0.4 percent to 12.80 shillings.

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