NAIROBI, Kenya, Dec 5 – Kenya’s banking sector experienced a 15 percent core earnings growth for the nine months ending September 2016, despite the challenging economic environment, according to a report by Cytton Investments.
The growth is attributed to new innovative products and channels as well as increased financial inclusion and growth of Kenya’s middle class.
The report credits agency and mobile banking models with the reduction of operating expenses and improved efficiency.
“Growth for most banks with regional subsidiaries was driven mainly by the Kenya businesses as their regional operations underperformed,” states the report.
Deposits grew faster than loans at 7.7 percent, but lower than the 5-year average of 14.9 percent while non-performing loans continues to be a concern in the sector.
“With the ratio of non-performing loans to total loans rising to 8.3 percent in Q3 from 6.2 percent at the end of last year, there emerges concerns around asset quality, and the risk assessment framework currently in use,” states the report.
As a result, listed banks have been pushed to increase provision for bad loans by 93.8 percent with non-listed banks increasing the same by 175.9 percent.
During the period, which also saw the enactment of the law capping interest rates, there was a slowdown in private sector lending at 5.3 percent.
Commercial banks held sh1 trillion of government paper in2016 compared to Sh737 billion in September 2015, signaling and causing a cooling down in the GDP growth.
Maurice Oduor, Cytonn’s Investment Manager, says banks will have to diversify their revenue beyond interest income as a result of capping of interest rates.
“We are likely to see increased cost of funding and reduced yield on assets which translates to a reduced net interest margin affecting the profitability of banks,” says Oduor.
Other key issues that will impact the sector moving forward includes increased mergers and acquisitions, cost cutting measures which may include job losses and increased regulation.
Despite the challenging operating environment, Kenya’s banking sector remains one of the most profitable in comparison to other markets in Africa.
“With a sector valuation of 1.0x price to book and 5.4x price to earnings, we think that the sector has become fairly attractive for a long-term investor.”