Kenya's Mid-Tier Banks-H1 2012 Results Show Pressure from High Interest Rate Regime
Thursday, 13 September 2012

Financial results for the first half of 2012 show that some of Kenya’s less diversified mid-tier banks rely on corporate clients who can negotiate better interest rates terms for their deposits, which drove up interest expenses during the recent high interest rate regime. Regional expansion, increasingly aggressively pursued, will help to diversify their portfolio.

Client Diversification

Some of the less diversified banks have suffered in the recent high interest rate regime. Most of the tier-two banks are reliant on wholesale clients who deposit and borrow large amounts and can negotiate better interest rates terms for their deposits as opposed to the cheap mass-market deposits.

  • Despite prudent management of other expenses that rose marginally from KES2.6bn to KES2.9bn, National Bank of Kenya (NBK), for example, suffered from the high interest rates on customer deposits. Loaned funds fell to less than half of the available deposits, so interest expenses rose much faster than the corresponding interest income.
  • Imperial Bank was able to maintain a near flat growth in net interest expenses, a feat that some mid-tier banks have been unable to accomplish in the face of huge interest expenses from their wholesale depositors. The marginal drop in profitability was caused by a rise in other operating expenses.
  • Although these banks stand to benefit more from falling rates, the situation may have encouraged them to pursue more balanced portfolios. NIC Bank, for example, is reportedly targeting a 50/50 deposit mix between retail and corporate clients by 2015, from the current 70/30 mix dominated by corporate customers.
  • Chase Bank is targeting the SME market and has been expanding its branch network from currently 21 branches  to areas where it can cater better to these businesses. The bank also introduced theKilele Planet portal where SMEs can network online to deepening their SME banking portfolio.
Regional Expansion
Although mid-tier banks already have above core capital levels above the legal requirements, some of them – including NIC Bank, Diamond Trust Bank (DTB) and Family Bank  are raising additional capital for local and regional expansion as the large banks’ regional growth has shown the value of cross-border growth.
  • Like other mid-tier banks, Family Bank is holding a KES1.5 right issue as a part of an equity-debt mix drive to raise KES4.5bn. The money is intended to finance the bank’s expansion locally to raise branches number by nine to 74 as well as a possible cross-border expansion into South Sudan. The fundraising comes before the expected listing on the Nairobi Securities Exchange (NSE) in 2013 that is expected to be by introduction.
  • NIC Bank is expanding rapidly with its KES2bn rights issue (between August and September 2012) to, among others, fund its expansion and expected mergers and acquisitions. According to Reuters, NIC – which already has operations in Uganda and Tanzania   is considering further regional expansion while deepening her Kenyan market by acquiring up to three small banks. The bank intends to add up to eight new branches to its existing 20 throughout the country.
  • Commercial Bank of Africa (CBA) is looking to expand their regional footprint beyond their Tanzanian operation with a greenfield entry into the Ugandan market, followed by possibly Rwanda and Burundi next year. This, the Business Daily reports, will be financed through KES1.5bn recently raised from shareholders by a private placement.
  • At the end of the 2011 financial year, I&M Bank’s subsidiaries in Tanzania and Mauritius contributed 8.6% of the profits and the bank will continue this regional growth with the joint acquisition of Banque Commercial du Rwanda with French and German development finance institutions Proparco and DEG in July 2012. The 80% acquisition from Actis, a private equity firm, puts I&M in charge of Rwanda’s third largest bank.
While the competition is likely to be higher from the local banks and the bigger Kenyan banks in those foreign markets, early results are encouraging with the operations of even tier two banks like DTB in those markets proving successful. Several rights issues also attest to the strength of the local capital market.

Core Capital Increase?

The December 2012 deadline for banks to increase core capital from a minimum of KES250m to KES1bn is among a raft of regulatory changes intended to increase consumer confidence in the banking sector. The central bank also hopes to encourage mergers and acquisitions to reduce the number of banks and establish stronger banks.

While there is expectation that all banks will have met this capital increase first announced in 2009, they have been spared, albeit temporarily, other prudential guidelines that were to take effect in August 2012, affecting capital adequacy ratios and boardrooms compositions, including increasing the number of independent directors).

‘The capital management framework will be strengthened to ensure banks hold adequate capital in relation to their risk profile and have adequate buffers to ride out periodic macro-economic shocks,’ reads CBKs second quarter banking performance report.

According to The Standard, the implementation of the prudential guidelines had been postponed after lobbying by the Kenya Bankers Association, which warned that the industry would need more time. Among the guidelines was the requirement that commercial banks maintain a capital conservation buffer of 2.5% above the minimum capital adequacy ratios. CBK further directed that the ‘buffer should be made up of high quality capital which should comprise mainly of common equity, premium reserves and retained earnings,’ which would necessitate some banks turning to shareholders for more capital, especially those banks already running on thin capital ratios.

Key Performance Data

  • Profits before tax rose from KES1.95bn during the first half of 2011 to KES3.92bn in the corresponding period for the year 2012.
  • Profits after tax doubled from KES1.21bn to KES2.42bn.
  • Interest income rose from KES1.33bn to KES3.86bn, and interest expenses more than doubled from KES322m to KES899m.
  • Loans and advances decrease slightly from KES29.32bn to KES28.61bn.
  • Deposits also rose slightly from KES41.39bn to KES42.48bn.
I&M Bank
  • Profits before tax rose slightly from KES2.4bn to KES2.6bn.
  • Profits after tax also grew from KES1.69bn to KES1.77bn.
  • Interest income grew from KES3.99bn to KES6.49bn, but interest expenses on customer deposits nearly tripled from KES1.22bn to KES3.4bn.
  • Loans and advances rose from KES64.33bn to KES74.48bn.
  • Deposits rose substantially from KES76.98bn to KES94.69bn.
NIC Bank
  • Pre-tax profit rose 42% from KES1.6bn to 2.27bn.
  • Profit after tax grew 45% from KES1.09bn to KES1.59bn.
  • Net interest income grew by 30% to KES2.5bn from KES1.9bn despite interest expenses on customer deposits rising from KES761m to KES2.91bn.
  • The loan book grew 32% to KES62.39bn from KES47.26bn.
  • Customer deposits also went up from KES55.52bn to KES72.71bn.
Commercial Bank of Africa (CBA):
  • Profits after tax rose to KES1.4bn from KES979.9m, a 43% increase.
  • Interest income more than doubled to KES5.6bn from KES2.65bn while interest expenses grew from KES683m to KES3.02bn.
  • Its loan book rose by 20% to KES48bn, up from KES40.4bn.
Imperial Bank
  • Profits before tax dipped from KES1.01bn in 2011 to KES918m.
  • Profits after tax fell by 9.6% from KES710.9m to KES642.7m.
  • Total interest income rose from KES1.87bn to KES3.52bn, a slower rate than interest expenses which grew more than four-fold from KES584m to KES2.29bn.
  • Loans and advances grew from KES14.36bn to KES17.03bn.
  • Customer deposits also rose from KES17.61bn to KES21.06bn.
National Bank of Kenya (NBK)
  • Profits before tax fell 17% from KES1.1bn to KES911.7bn.
  • Profits after tax also fell 10% from KES640m to KES575m.
  • Total interest income grew by 45% from KES3.09bn to KES4.49bn but interest expenses more than five times from KES422.8m to KES2.02bn.
  • Loans and advances grew 12% fromKES24bn to KES27bn.
  • Customer deposits rose by 20% from KES20bn to KES60bn.
Prime Bank
  • Profits before tax rose from KES465m to KES625m.
  • Profits after tax also grew from KES366m to KES472m.
  • Interest income grew from KES1.35bn to KES2.53bn while interest expenses on customer deposits nearly tripled from KES680m to KES1.79bn.
  • Loans and advances increased from KES17.15bn to KES19.76bn.
  • Customer deposits also went up from KES29.5bn to KES32.82bn.
Chase Bank
  •  Profits before tax rose from KES408.11m to KES485.54m.
  • Profits after tax rose from KES285.68m to KES339.8m, a 19% increase.
  • Interest income more than doubled to KES2.8bn from KES1.32bn while interest expenses on customer deposits nearly quadrupled from KES435.43bn to KES1.64bn.
  • Loans and advances grew 59.5% from KES14.1bn to KES22.4bn.
  • Customer deposits grew 56.6% from KES19.9bnto KES31.1bn.
Bank of Africa
  • Profits before tax fell from KES380m to KES290m.
  • Profits after tax fell 21% from KES 281m to KES221m.
  • Interest income more than doubled from KES1.8bn to KES3.85bn but interest expenses grew more than three times from KES775m to KES2.7bn.
  • Deposits were up 20% from KES33.76bn to KES40.65bn.
  • Loans and advances went up KES39% to KES34.53bn from KES24.93bn.
Family Bank
  • Profits before tax grew marginally by 5.2% to KES303m from KES288m.
  • Profits after tax rose 9.9% from KES187m to KES206m.
  • Total interest income almost doubled from KES1.2bn to 2.2bn while total operating income rose from KES1.7b to KES1.9bn.
  • The bank’s loan book grew by 48.1% to Sh17.3 billion from KES11.7bn.
  • Interest expenses on customer deposits rose more than 6 times from KES111m to KES781m as the bank grew her deposits substantially from KES17.4bn to KES23bn.
  • The bank saw her profit of KES126m in the first six months of 2011 turn to a KES611m loss for a similar period in 2012.
  • Interest income grew from KES980m to KES1.4bn but interest expenses grew from KES438m to KES1.3bn, an over 200% leap, nearly wiping out the interest income. The net interest income was KES56m.
  • Non-interest income grew slightly from KES456m to KES483m and when combined with net interest income gave a total operating income of 540m.
  • This could however not match other operating expenses which had ballooned from KES873m to KES1.15bn.
  • The loan book increased from KES11.5bn to KES12.4bn.
  • Customer deposits also rose slightly from KES17.2bn to KES19.1bn.
Also read:

H1 2012 Results of Kenya’s Big Banks
RenCap on Co-op Bank H1 2012 Results

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