Kenya central bank says lenders face new era of lean profits

This article was written by Felix Njini. It appeared first on the Bloomberg Terminal.

Kenyan lenders must adjust their business models to adapt to a new era of lower profits as interest-rate caps curb investor returns, Central Bank of Kenya Governor Patrick Njoroge said.

Return on equity in the Kenyan banking industry declined to 13.6 percent in March from 18.2 percent in June, Njoroge told reporters Tuesday in the capital, Nairobi. For the country’s biggest lenders, the drop was more severe, slumping to 23 percent from almost 35 percent. That compares with an average of 17.4 percent for South Africa’s four biggest banks and 22.3 percent for Nigeria’s top lenders, according to data compiled by Bloomberg.

Lenders are “entering a world where there will be smaller interest margins,” Njoroge said. “Returns will be much smaller.”

The top five banks in East Africa’s largest economy this month reported a decline in first-quarter profit as the government-imposed cap on commercial lending rates curbed loan income. The ceiling, set at 400 basis points above the central bank’s official rate of 10 percent, may cut revenue in the industry by as much as 25 percent this year as it scales back on unsecured lending, Barclays Bank of Kenya Ltd. Chief Executive Officer Jeremy Awori said May 11.

Kenyan banks’ “golden period” may have ended with the rate-cap law and lenders should brace for a “structural decline in profitability,” Exotix Partners LLP said in a note on May 18. Banks’ net interest margins will “remain under pressure” until 2018 with the government unlikely to completely reverse the legislation, Exotix said.

The cap resulted in a 5.7 percent decline in lending to small business between August, when it was announced, and April, according to the central bank. Banks have “tightened” credit standards and are focusing more on short-term financing, even for large corporations, Njoroge said.

The regulator is holding discussions with bank executives and urging them to diversify revenue streams in order to build their resilience, Njoroge said. Lenders are also being encouraged to shift from “lazy banking to real banking,” a switch that would entail them relying less on high loan charges and returns on government securities for their income, he said.

“Banks are still working under the old business models,” Njoroge said. “They need to be more forward looking so as to be resilient, because shocks will come and they need to be ready for that.”

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