The Charts That Show How Biggest Kenyan Banks Are Being SqueezedBy
ApexAfrica Capital sees lending slowdown continuing this year
President Kenyatta unlikely to relent on rate caps until vote
Kenya’s big five are getting mauled.
The East African nation’s largest banks all posted a drop in first-quarter earnings as a government-imposed cap on commercial lending rates curbed the amount they can charge for loans. The decline in net interest income in the three months through March ranged from as much as 15 percent at Equity Group Holdings Ltd., the biggest lender by market value, to 1.5 percent at Co-Operative Bank of Kenya Ltd., which ranks at No. 3.
The ceiling on interest rates -- 400 basis points above the central bank’s benchmark rate of 10 percent -- is forcing lenders to compete more aggressively on pricing for loans and reducing their ability to provide loans to riskier clients.
The weighted average interest rate charged by banks fell almost 200 basis points to as low as 11.1 percent at some banks in the quarter, said Faith Mwangi, senior investment analyst at Genghis Capital Ltd. in Nairobi. That compares with an average 18 percent in June, according to central bank data.
“Kenyan banks used to give out a lot of unsecured loans, some by being creative in terms of collateral or timings of repayments,” said Mwangi. “The banks have been forced to tighten up their loan criteria. It doesn’t make sense any more for them to offer riskier loans.”
The decline in loan income was one of the key drivers of the drop in profit at the top five lenders, which ranged from 1.9 percent at KCB Group Ltd., Kenya’s second-largest bank, to 21 percent at Standard Chartered Plc’s Kenyan unit, the fourth-largest. Loans to the private sector grew at the slowest pace since September 2003 in March, according to central bank data.
The slowdown in lending will continue to weigh on earnings for the rest of the year, according to Abizer Sharafali, a senior analyst at ApexAfrica Capital Ltd. in Nairobi. While banks are lobbying the government to remove the caps, there’s an acceptance that any decision won’t precede presidential elections on Aug. 8 because it could prove politically unpopular, he said.
Kenyan President Uhuru Kenyatta introduced the cap on banks’ lending rates in August, ignoring the advice of the central bank as he fulfilled a 2013 election-campaign pledge to reduce the cost of credit. In March, Kenyatta acknowledged the introduction of the law had the “unintended consequence” of slowing lending and said the government is working to resolve the problem.
“This year there will be slow growth in lending, maybe picking up at the end of the third and fourth quarters a little bit,” Sharafali said from Nairobi. “If you look at the whole year, 2017 will be down significantly compared to 2016 and maybe pick up in 2018 going forward.”
Even after a rally of as much as 35 percent this year for some of the nation’s lenders, most Kenyan bank stocks are still down over the past 12 months. Earnings will probably decline by an average 1.6 percent in 2017, and will remain flat for almost three years, Ronak Gadhia, an analyst at Exotix Partners LLP in London, said in a note on May 18, describing the lack of earnings growth as “unprecedented territory.”
Stocks are fully valued at the moment, he said. The “golden period of profitability” is over, Gadhia said.