Last year was the first full-year of operation by commercial banks in a regulated interest rate regime. Parliament passed a law that capped interest at four per cent above the Central Bank Rate (CBR), and deposit rate at 70 per cent of the same rate.
The law came into effect in October 2016. The effects of the rate cap on the performance of individual institutions show a sector that has been completely scattered as individual banks were forced to confront the realities of the harsh new regime, and the effect on their viability and profitability.
In the previous regime of fully regulated interest rates, commercial banks simply piled premiums on their base rate, a figure that was largely arbitrarily determined and given to their customers with the biggest muscle. The subsequent increments in payments by increasingly stressed borrowers enabled the banks to maintain ever-booming profits. The status of the economy seemed to have little or no effect on the profitability of banks.
As such, the whole of the banking sector was awash with booming profit growth, even as non-performing loans grew alarmingly. Central Bank of Kenya, the sector’s regulator, preferred to ignore the obvious correlation. Banks could not care less.
Further, their behaviour was very predictable. All they simply did was line up behind the dominant players, the so-called tier one banks, and move their interest rates up and down in tandem, creating a cartel-like behaviour in the lending sector.
In contrast, the new regime of interest caps has created an every-bank-for-itself attitude. With a maximum rate beyond which they cannot charge, keeping costs tamed has become the holy grail. The full effect of the new regime and how it has scattered banks can be seen clearly from the third quarter trading results of the year to September 2017 that were released by the institutions recently.
They follow no given pattern. From banks that grew their profits as usual, to those that grew them marginally, to those whose profits slumped, and those that registered losses, the banking sector reflected the norm in any given business sector.
Previously, the reporting periods were a time for banks to bask in the glory of ever-expanding profits across the entire banking sector, with new entrants into the billion-shilling profit league every year. Times have changed.
This is because bank profits are now determined by how effectively every one of them manages its operations in an environment where space for manouvre has drastically shrunk. For instance, Stanbic Bank grew its profit in that period by 19.7 per cent to Sh3.2 billion.
Bank of Africa moved from negative territory to grow its profitability by 289 per cent to Sh7.4 billion, while Citibank stepped up its profit by 30 per cent to Sh2.8 billion. There were those that saw a marginal drop in profitability.
Co-operative Bank’s profit dropped by 9.5 per cent to Sh9.5 billion, Barclays Bank saw its profit down 12 per cent to Sh5.3 billion while Equity Bank also saw a slight drop in profitability to Sh14.6 billion.
Some banks experienced significant drops in profitability. Standard Chartered Bank’s profit dropped 39 per cent to Sh4.7 billion, Housing Finance’s profit dipped 80.9 per cent to Sh159 million while United Bank for Africa dropped to Sh14.4 million, a 74.9 per cent cut.
At the other end of the spectrum were several banks in negative territory.
Consolidated Bank of Kenya posted Sh301 million loss, a 48 per cent drop, Jamii Bora Bank’s loss widened to Sh337 million while Sidian Bank dropped 225 per cent to post a Sh274 million loss.
For the banks that dropped in profitability or posted losses, the fact that they cannot push up interest rates to extract more revenue from their hapless borrowers has left them stranded.
Further, some banks were either marginally profitable, or in negative territory even before the cap on interest rates. Hard decisions are expected in the near future, probably as early as this year, in a good number of boardrooms as the impact of the new regime takes its toll on the bottom lines of various banks. Expect mergers, buyouts and even closures as the ripple effects move into the second full year.
And yet, the outcry by banks over the falling profitability across the sector is really disingenuous. This drop should be expected in an economy that probably performed the worst over a five-year period, given the political pressures.
This is the first time that the performance of the banking sector has aligned with the performance of the economy. Banks have been walking on water for too long. The sector has reacted by taking drastic measures. Staff have faced the scythe as workers are laid off. Others have closed down branches.
Digitalisation is now being widely rolled out, and banking services are being automated, removing customers from banking halls. This readjustment to “cut out fat” will continue into 2018.
The banking sector also threw a collective tantrum and drastically cut down on availability of credit. The thinking seemed to have been to “prove” to the government that the rate cap would work against the economy and needed to be removed. However, these antics have been singularly unsuccessful in making an impression on the government on the need to remove the interest rate cap. Kaara can be reached at [email protected]