The Exchange - East Africa's Source for Financial News The Exchange MAY 2017 - FINAL (1) | Page 9

MAY 2017
9.
Kenya’s Banking Sector—A Rough Road Ahead
PART 1
I
n the recent past, the banking sector has
come under regulatory pressure that has
seen stricter implementation of already
present rules and enactment of new regulations.
A key regulation passed in September 2016 was
the Banking (Amendment) Act 2016 which
requires bank lending rates to be capped at
400bps above the Central Bank Rate (currently
at 10% - implying lending rates of 14%) and set
a floor for deposit rates at 70% of CBR (implying
deposit rates of 7%).
In our view, a key risk for the sector remains
continued regulatory pressure.
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BANKING (AMENDMENT) ACT 2016 - Some
Banks are more equal than others
Using FY15 numbers as our proxy, we set
out to assess the potential impact of the law
on earnings. Our methodology assumptions
included
1.
2.
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That earnings from regional units will
remain unchanged.
That the rate cap would be applied
uniformly across deposits and loans
regardless of segment. Key findings
included:
On average, the sector is paying an
average of 9.6% Weighted Average
Interest Rate (WAIR) on interest earning
deposits against the minimum WAIR
of 7%. Barclays Bank pays the lowest at
6.7%. Equity Bank pays the highest at
13.6% mainly from a few accounts as 67%
of its interest earning deposits are retail
deposits. Co-op Bank is paying a premium
at 12% mainly due to the bulk of fixed
deposits (accounts for 49.3% of interest
earning deposits and 71.5% of interest
expense).
Deposit expense showed a 17.8% decline.
Equity Bank shows the highest decline in
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interest expense though we believe this
will be softened by an increase in interest
earning deposits as the bank moves
towards aggressive deposit uptake.
Interest earning deposits were at 25% in
FY16 vs. 19% in FY15. KCB stands to see
a 32.5% decline in interest expense which
we expect will be supported further by
winding down of expensive deposits as
the bank opts to be cautious on growth
going forward.
Tier 2 banks stand to be the biggest
beneficiaries in reduced deposit expense.
Due to low deposit mobilization, these
banks traditionally paid a premium for
deposits to attract them. With a uniform
deposit rate and a capped return ceiling,
our view is that ‘rate shopping’ will
decline as banks will be unable to pay a
significant premium to the 7%.
Sector loan WAIR was at 13.7% owing to
the bulk of corporate loans (average of
42.7% of sector loan book) which attract
sub 14% loan rates. Equity Bank recorded
the highest WAIR at 16% with the bank’s
lending base primarily set in the high
yielding SME space (accounts for more
than 50% of loan book). Stanbic, on the
back of a mainly corporate book (65.1%
of loan book), had the lowest loan WAIR
and