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Banks make lower profits after banking on government bonds

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Listed banks in Kenya registered lower profits in the three months to March 31, after heavy investments in government securities went bust, attracting lower yields.

The banks had put their funds in risk-free Treasury bills and bonds after the government introduced an interest rate cap in September 2016. Many lenders reduced their lending to small and medium-sized enterprises and individuals, whom they consider high-risk.

The lenders had invested more than Ksh2.5 trillion ($25 billion) in government securities, only for the yields to drop, resulting in lower earnings.

The latest Central Bank monthly Economic Indicator Report (March 2019) shows that yields on the 91-day Treasury bill fell to 7.09 per cent in the three months to March 31, from a high of 8.03 per cent in the same period last year. Similarly, returns on the 182-day Treasury Bills fell to 8.58 per cent from 10.48 per cent: On 364-day Bills, returns declined to 9.52 per cent from 10.81 per cent in the same period last year.

The banks’ investments in Treasury bills and bonds grew at 16 per cent this year, down from 25 per cent in the same period last year, according to analysts at Cytonn Investments.

Last month, Equity Bank, a major player in the bond market, said it would divest Ksh150 billion ($1.5 billion) from government paper and channel it to SMEs in order to grow its profit margin.

During the period, the lenders faced rising numbers of bad loans, slower growth in non-funded income (fees and commissions), and reduced interest income on loans and advances. This was after the Central Bank dropped the benchmark lending rate to nine per cent from 9.5 per cent in July last year, reducing lending rates to 13 per cent from 13.5 per cent.

The regulator retained the Central Bank Rate at nine per to protect households and businesses from high borrowing costs.

According to CBK, bad loans in the banking industry increased 17 per cent to Ksh977.3 billion ($9.77 billion) in the first three months of this year, from Ksh837.1 billion ($8.37 billion) in the same period last year.

“The longer the rate cap law remains in place the more likely it is that we will see further deterioration in NPLs in the Kenyan banking sector,” analysts at Renaissance Capital said.

An analysis of the banks’ financials by Cytonn Investments shows that the earnings for the 12 lenders listed on the Nairobi Securities Exchange slowed down, growing by 12.2 per cent for the three months to March 31 compared with a growth of 14.4 per cent in the same period last year, largely due to falling interest income on loans and government securities, which grew by just 3.6 per cent, down from 9.3 per cent in the same period last year.

The listed banks are Barclays Bank Kenya, Diamond Trust Bank, Equity Bank, KCB, NIC Bank, Co-op Bank, Bank of Kigali, National Bank of Kenya, I&M Bank, Stanbic Bank, Housing Finance and Standard Chartered Bank.

The industry’s loan book grew by an average of 7.7 per cent, with lenders targeting corporate and small and medium enterprises.

According to Cytonn Investments the banks’ slower growth in interest income, despite the increased allocations to both loans and government securities, is attributed to the decline in yields on loans owing to the reduction in the central bank’s policy rate and the decline in yields on government securities.

As a result, net interest margin for the listed lenders declined to eight per cent from 8.1 per cent.

The banks’ total fees and commissions grew at a lower rate of 11.2 per cent compared with 12.2 per cent in the same period last year largely subdued by the implementation of the Effective Interest Rate model under the International Financial Reporting Standards in 2018, which requires banks to amortise the fees and commissions on loans over the tenor of the loan

“The relatively slower loan growth, the majority of which is to corporates, also inhibited the growth in fee and commission income loans, as corporates tend to be charged relatively lower commission rates,” Cytonn Investments said.

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