Kenya Listed Banks H1’2019 Report

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:

1. Kenya Listed Banks recorded a 9.0% average increase in core Earnings per Share (EPS), compared to a growth of 19.0% in H1’2018. As a result, the Return on Average Equity decreased marginally to 19.3% compared to 19.5% recorded a similar period in 2018,
2. Deposit growth came in at 8.6%, slower than the 10.0% growth recorded in H1’2018. On the other hand, interest expense increased at a slower pace of 5.3%, compared to 12.0% in H1’2018, indicating that banks have been able to mobilize relatively cheaper deposits.
3. Average loan growth came in at 9.8%, which was faster than the 3.8% recorded in H1’2018, indicating that there was an improvement in credit extension to the economy. Government Securities on the other hand recorded growth of 12.1%, which was a slower growth rate compared to the 14.9% in H1’2018. This shows that banks have begun to adjust their business models, focusing more on private sector lending as opposed to investing in government securities, whose yields declined during the year.
4. The average Net Interest Margin in the sector came in at 7.7%, lower than the 8.1% in H1’2018. The decline was mainly due to a decline in yields recorded in government securities, coupled with the decline in yields on loans due to the 100-bps decline in the Central Bank Rate, and,
5. Non-Funded Income grew by 16.5% y/y, faster than the 6.9% recorded in H1’2018. The growth in NFI was boosted by the total fee and commission income which improved by 12.7%, compared to the 4.6% growth recorded in H1’2018, owing to the faster loan growth.

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.