The Inside Track to East Africa's Economies
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H1 2012 Results of Kenya’s Big Banks Print E-mail
Friday, 24 August 2012
Kenya’s big banks continue to be profitable in the first half of 2012, still benefitting from the high-interest rate regime imposed by the Central Bank of Kenya (CBK) to reign in inflationary pressures and the shilling’s sharp decline in value last year.

Kenya Commercial Bank (KCB) Key Data for H1 2012:
  • Profit before tax rose to KES8.5bn, up 48% from KES5.7bn.
  • Profits after tax rose by 50% from KES4bn to KES6bn.
  • Net interest income rose by 36% to KES14.3bn from KES10.5bn, with operating income recording a 29%growth to KES21.16bn from KES16.4bn.
  • Fees and commissions grew to KES4.6bn, representing a 9% increase from KES4.23bn.
  • International business reported a 100% growth in pre-tax profit from KES300m to KES600m (KES486.4m after tax).
  • Provision for bad debts increased significantly by 72% from KES840m to KES1.4bn.
  • Net loans and advances grew by 15%, from KES175.2bn in 2011 to KES202bn.
  • Customer deposits increased from KES215.7bn to KES278.5bn.
  • Total operating expenses surged by 16% to KES11.94bn from KES10.29bn.

Despite slower growth in lending, the still high interest rates and the industry’s large net interest margin are expected to sustain the bank’s performance. However, if interest rates fall substantially due to lower consumer price inflation, the bank has the capacity to aggressively grow its loan book. CEO Martin Oduor also attributed the performance to prudent cost management. Despite the 16% increase, the bank has done relatively well with its cost-to-income ratio dropping from 62.8% to 56.4%. The bank has moved to a leaner and more effective staff, reducing executive staff from 22 to seven recently. Information technology and network upgrade that figured significantly in the rise in operating expenses are also expected to contribute to the goal of bringing the cost to income ratio to 51%.

Equity Bank Key Data for H1 2012
  • Profit before tax grew by 29% to KES7.62bn from KES5.89bn.
  • Profits after tax rose 14.04% from KES4.73bn to 5.4bn.
  • Equity’s regional subsidiaries contributed KES586m, 10.8% of the bank’s KES5.4bn after tax profits. Total income rose by 34% from KES13.15bn to KES17.56bn, with net interest income rising from KES7.26bn to 11.2bn.
  • Loan loss provision increased slightly from KES1.15bn to KES1.24bn.
  • Loans and advances grew 27% to KES124.46n, compared to KES97.71bn at the end of the same period in 2011.
  • Customer deposits grew by 22% from KES124bn to KES151bn.
  • Total operating expenses rose significantly from KES7.3bn to KES10bn.
With KCB aiming for a 51% cost-to-income ratio in the short term, Equity may also seek more efficiency to keep in touch with its regional competitor. In fact, Equity Bank intends to put its strong domestic and regional expansion on hold for the coming two years to focus on its existing operations.
But perhaps of more concern to the bank should be the declining deposits: The bank’s deposits fell from KES16.45bn in the second half of 2011 to KES10.26bn in the first half of 2012, with only KES398m of this in the second quarter. CEO James Mwangi has attributed this to the inflation rate, although this has been on a steady decline.

Standard Chartered Bank H1 2012 Key Data
  • Pre-tax profit rose 87% from KES3.5bn to KES6.5bn.
  • Net profit rose 81.5% to KES4.5bn, upfrom KES2.5bn.
  • Total income grew 54% to KES10.99bn, upfrom KES7.129bn, with net interest income growing from KES4.5bn to KES7.32bn.
  • Loan loss provision increased from KES233m to KES355m.
  • Loans and advances grew by 24% to KES104.1bn from KES83.69bn.
  • Customer deposits grew by 27% from KES109.23bn to KES138.2bn.
  • Operating expenses rose by 22% to KES4.49bn from KES3.66bn.

The bank, together with its international peer Barclays, continue to defend their longstanding niche in wholesale banking in the country. A 55% growth in wholesale banking income contributed significantly to the results with the bank said to have captured several big new clients like Tullow Oil. Superb cost management also saw the cost income ratio dropping from 48% to 38%.

Barclays Bank H1 2012 Key Data
  • Net profit grew 16% to KES4.2bn from KES3.6bn.
  • Net interest income increased to KES8.9bn from KES7.3bn,while total operating income rose from KES12.4bn to KES13.6bn.
  • Loans grew to KES101.1bn from KES91.8bn the previous period.
  • Provisions for bad debt rose from KES392.5m to KES458.9m, but decreased as a proportion of net loans to 0.3%.
  • Deposits decreased from KES128.4bn to KES122.4bn.
  • The bank’s operating expenses rose from KES7.13bn to KES7.38bn.
  • Financial commentators have pointed out Barclays Bank’s risk aversion in a season when competitors have taken more risks and have been rewarded with far superior profits. Barclays was overtaken in profits by Equity and KCB and now Standard Chartered Bank, with Co-operative Bank only behind by a few million. However, thanks to its recent staff trimming and technology deployment, the bank’s efficiency has improved considerably. But cutting expenses, while improving profits, has its limits. Notably, the fall in deposits and the better than average growth in loans may force the bank to raise its deposit rates to stem the negative deposit growth and maintain a comfortable buffer between the two.
Co-operative Bank H1 2012 Results
  • Pre-tax profit for the first six month of this year rose 21% to KES5.01bn from KES4.14bn.
  • Net profit rose from KES3.3bn to KES4.02b, a 21.7% growth.
  • Gross interest income grew from KES7.2bn to KES12.9b, a 78.4% increase. A 318% growth in interest expense from KES1.3bn to KES5.5bn, however, reduced net interest income growthto 25%, fromKES5.9bn to KES7.4bn.
  • Total operating income grew from KES9.33bn to 11.48bn.
  • Loans and advances grew 18.3% from KES95.1bn to KES112.6bn.
  • Loans and advances increased by 18.3% to KES112.6bn from KES95.1bn.
  • Customer deposits rose from KES130.71bn to KES145.68bn.
Despite the huge growth in interest income, the bank’s numbers were pulled down by the interest expenses which grew a massive KES4.2bn at a time of high interest rates. Other operating expenses also rose significantly from KESKES5.27bn to KES6.58bn. Managing Director Gideon Muriuki indicated that the bank was in the process of managing these costs chiefly by staff rationalisation and staff re-deployment to the new branches. The bank has also joined its peers in the young, but lucrative South Sudan market. Regional subsidiaries are providing a small fraction of these banks’ profits, but their fast growth in recent years indicates their potential.

Diamond Trust Bank (DTB) Group H1 2012 Key Data

  • Profit before tax grew from KES2.05bn to KES2.86bn.
  • Net profit rose by 23% from KES1.33bn to KES1.69bn.
  • The bank’s subsidiaries in Uganda, Tanzania and Burundi contributed KES272m to the profit (16%).
  • Total interest income almost doubled from KES4.129bn to KES8.118bn, but interest expenses more than doubled from KES1.18bn to KES3.78bn.
  • Loans and advances grew from KES63.65bn to KES81bn.
  • Customer deposits also rose from KES75.95bn to KES95.12bn.
CFC Stanbic H1 2012 Data
  • Profits before tax grew 32.9% from KES1.4bn to KES1.86bn.
  • Profits after tax rose 53% from KES841m to KES1.28bn.
  • Interest income grew substantially from KES3.55bn to KES6.26bn while interest expenses more than tripled from KES843m to KES3.12bn. .
  • Loans and advances for the period decreased from KES68.2bn to KES65.3bn.
  • Deposits rose from KES78.29bn to KES83.81bn.
Perspectives
Kenya’s big banks – which take nearly 70% of the overall banking sector’s profits - continue to be profitable, despite bankers’ perennially concerned expressions. And the quality of the loan portfolio has not deteriorated too markedly: The ratio of gross non-performing loans to gross loans stood at 4.5% in June 2012, a 7.1% increase from KES53.7bn to KES57.5bn from March 2012 according to CBK data. At the same time, deposits have grown from KES1.49trn to KES1.66trn during the six-month period.

Local banks have become key players: KCB and Equity Bank are going head to head with former top dogs Barclays and Standard Chartered and fast rising Co-operative Bank forming a sort of second tier at the top. Also in this top group are Co-operative, CFC Stanbic and Diamond Trust Bank (DTB), although the latter is classified as a medium-sized bank. In addition, Kenya’s domestic banks are growing their footprint across the region.

CBK has begun to lower its benchmark Central Bank Rate (CBR), which will put downward pressure on interest-rate income. Kenya’s economy can anticipate a slowdown in business as the next general elections in March 2013 approach, but the prospect of commercially viable oil deposits strengthens the outlook for the banking sector: Standard Chartered has reportedly added Tullow Oil to its client list while KCB expects that a confirmed find could raise its earnings by 20-30%.



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