Eight top commercial banks that account for more than 90 per cent of listed lenders’ income shed off millions shillings in cost cuts even as their total income rose in the first six months of the year, helping them shrug off the impact of the rate caps and grow their profits, latest industry data shows.
KCB #ticker:KCB , Equity #ticker:EQTY , DTB #ticker:DTK , Stanbic, NIC #ticker:NIC , StanChart #ticker:SCBK , Barclays #ticker:BBK and Co-op #ticker:COOP banks reduced their total costs to about Sh82.5 billion or by over Sh700 million as total income rose 8.7 per cent to more than Sh151 billion in the half year. That action saw costs, relative to income (cost-to-income, CTI) ratio, fall to 55.7 per cent in the period under review compared to 59.2 per cent last year.
The decline in costs particularly helped the banks to increase their net profit by nearly a fifth compared to the same period last year.
“With the inception of the Banking (Amendment) Act 2015 in 2016, banks sought to mitigate the reduced interest income via various cost rationalisation measures. Thus, the Cost to Income Ratio (CIR) improved to 55.7 per cent in the first half of 2018 from 59.2 per cent in the same half in 2017,” Cytonn Investments says in their most recent analysis.
That was only possible with the alignment of employee head count to operational — another way of describing staff cuts — that also came with the closure of a number of branches.
Industry statistics show that listed banks cut the number of employees by 1,732 and closed 42 branches last year, leading to the lower operation costs in the first half of this year.
“Effort was made with regards to cost management that led to modest growth in operating expenses,” Sterling Capital said in a separate report.
Genghis Capital, another investment analyst, said that the banking sector had shown resilience on the Nairobi Securities Exchange (NSE) despite the challenges arising from restrictions on the movement of interest rates.
“We note that prospects for the banking counters are improving with the changing operating environment. There still exists some uncertainty with the interest rate cap ceiling, which is set to be maintained,” Genghis Capital said.
The significant decline in costs relative to income arose because the listed banks are the biggest in the market in terms of assets, profitability and market capitalisation.
Commercial banks also cut provisions for losses arising from loans as they applied the new financial reporting rules – the IFRS 9– which requires them to provide for potential default on a loan at the point of its disbursement rather than after the material occurrence of a loss as was previously the case.
“New provisions in the first half of 2018 could have dropped due to more cautious lending and higher credit profiling standards under IFRS 9,” Genghis Capital said, adding that there is still reason to remain cautious about the large drop in provisions for majority of the banks due to the inherent subjectivity in computation of probability of default in arriving at a loan loss provision charge.
Analysts also reported that the banks had also commenced using artificial intelligence to profile clients, a move that is bound to cut their losses going forward. “We have looked at four key focus areas, which are regulation, diversification, technology and asset quality in this report. With a tighter regulatory environment following the capping of interest rates and adoption of IFRS 9, diversification of revenue, cost management and asset quality management will prove to be the key growth drivers for players in the banking sector,” said Ian Kagiri, investment analyst at Cytonn Investments.
The drop in provisions happened even as the nonperforming loans (NPL) remained elevated at 12 per cent, nearly the same level as December 2017 but higher than the 9.3 per cent at the end of 2016.
The analysts said they expect the new reporting standards to improve credit quality, cut the mountain of bad loans, and further improve the outlook for the lenders. “We expect asset quality in the sector to improve due to more stringent credit profiling brought about by IFRS 9,” said Genghis Capital. Treasury secretary Henry Rotich has promised to revisit the controversial rate capping provision with a view to returning it to the liberalised environment as was the case before September 2016.
Banks are expected to raise lending rates once the sector is returned to a liberalised regime. In the most recent amendments to the law, MPs retained the rate cap on lending rates but changed the floor on the deposit rate to allow each institution to set its own rate – thereby offering the institutions some breathing space and opportunity to maximise returns in the context of restricted lending rates.