Capped rates bites bank’s bottom line with full effect felt in October

December 16, 2016
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Data released by the Central Bank of Kenya shows banks made a profit of Sh10.9 billion in September, but dropped to Sh9.3 billion in October

, NAIROBI, Kenya, Dec 16 – Commercial Banks felt the full impact of the revised banking act capping interest rates in October with Profit Before Tax declining by 14.7 percent.  

Data released by the Central Bank of Kenya shows banks made a profit of Sh10.9 billion in September, but dropped to Sh9.3 billion in October, the full month the sector operated under the new law.

Loan book quality continued to decline with Non-Performing loans ratio closing the month at 9.3 per cent from 9.1 per cent in September and 5.7 per cent in October 2015.

Analysts at Standard Investment Bank Research see the decline pointing to weak future earnings on the back of declined net interest earnings.

“Though most banks are targeting volume growth on loans to help compensate for the loss in net interest income, we are not confident in high volume growth being achieved. With the law essentially limiting a bank’s capability to price in risk, we believe banks are likely to be more stringent on lending standards or opt for shorter term loans. Both these actions would result in slow loan book growth,” the researchers say.

President Uhuru Kenyatta signed into law the Banking (Amendment) Bill, 2015 aimed at regulating interest rates charged by banks.

The new law has seen banks charge interest rates at 4 percent above the Central Bank’s lending rate.

The current CBK lending rate stands at 10 percent.

Banks are now moving towards cost cutting measures with a number announcing staff cuts over the last few months, which according to SIB, may offer some reprieve. However, the cost savings achieved would still not compensate the lost net interest income.

“Banks are also pushing their alternative channel platforms to further cut operational costs. Some lenders are considering revising charges on these platforms upwards to beef up non-interest revenue. With transactions on alternative channels being low value in nature, increasing costs on these platforms may end up discouraging use. Overall, we expect and Earnings per Share growth of 7.5 per cent year on year for Full year 2016 and 2.2 per cent year on year in Full Year 2017,” the firm states in their latest report.

Cumulatively from January to October, PBT was up 6.5 per cent to Sh130.3 billion with loan book growth remaining subdued for most part of the year; gross loans were up just 2.2 per cent.

Overall, the sector’s liquidity ratio improved to 43.6 per cent from 36.4 per cent in October 2015.

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