Following the release of H1’2019 results by Kenyan banks, the Cytonn Financial Services Research Team undertook an analysis on the financial performance of the listed banks and identified the key drivers of performance in the sector. There are four key drivers in the sector, namely Regulation, Revenue 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. We expect more forays by banks into the NFI segment, as players seek to alleviate the effects of the interest rate cap regime. Consolidation activity also picked up, with KCB Group acquiring National Bank, NIC Group which merged with CBA Group, and Equity Group which is set to acquire a controlling equity stake in Commercial Bank of Congo (BCDC) with the aim of merging the business with its existing subsidiary in DRC.
Some of the key highlights in the performance of the banking sector include:
The banking sector had a slower growth compared to the performance recorded in a similar period last year, largely due to the slower expansion of funded income segment, as Net Interest Income grew by 3.8% in H1’2019, slower than the 6.4% recorded in H1’2018. Funded income continues to record relatively slower growth, affected by the declining yields in both loans and government securities. With the deteriorating asset quality, as indicated by the rise in the Gross Non-Performing Loans (NPLs) ratio to 10.0%, from 9.8% in H1’2018, much higher than the 5-year average of 7.6%, we still expect banks to continue employing prudent loan disbursement policies, and consequently tighten their credit standards, in order to address these concerns around asset quality.
We maintain our view that the interest rate cap has not achieved its intended objectives of easing the access to credit and reducing the cost of credit, and thus needs to be repealed, so as to spur economic growth, as MSMEs have continued to struggle in accessing the much-needed credit. It would be helpful for the MSMEs to form a lobby group to engage directly with policy makers and legislators. We also continue to be proponents of promoting competing sources of financing, which should reduce the overreliance on bank funding in the economy, currently 90.0% to 95.0% of all funding. By having various competing sources of financing, this would trigger a self- regulated pricing structure, in the event of a repeal of the law.
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