SIB research shows rate capping to hit Co-op Bank the hardest

Co-operative Bank is set to take the hardest hit among listed lenders from the recent capping of interest rates, according to a research by Standard Investment Bank (SIB).

The bank’s net interest income, the major revenue item for lenders, is expected to shrink the most by an estimated 24.3 per cent, according to the SIB analysis.

Co-op will be followed by Equity Group whose interest earnings is set to fall 23.5 per cent.

Barclays is projected to see a decline of 15.2 per cent in interest income while that of StanChart is seen falling 11.6 per cent.

The new law passed in August put a cap on cost of loans and also stipulated the minimum interest rate payable on customers’ deposits.

The law sets the floor for deposit rates at 70 per cent of the Central Bank Rate (CBR) and a ceiling for lending rates at four percentage points above the benchmark rate.

This places the current interest rate on interest-bearing accounts at a minimum of seven per cent and the lending rate at a maximum of 14 per cent, with the CBR at 10 per cent.

The SIB says the full impact of the new law on net interest income will start to be felt from next year, with the “highest decline recorded by Co-op Bank (-24.3 per cent).”

The investment bank says its forecast is based on the mix of deposits and loan books by the listed firms, with that of Co-op Bank exposing it to relatively more compressed margins in the interest rates control regime.

SIB says Co-op Bank’s weighted average lending rate of 15.46 per cent in 2015 will come down to 13.4 per cent in 2017 while its average deposit rate will rise marginally to 5.37 per cent from 5.1 per cent.

This will see its interest margin drop from 10.36 per cent to 8.03 per cent over the same period.

The SIB said the bank would need to increase lending by a massive 62 per cent to match the interest income it would have earned if interest rates were not regulated.

The investment bank noted that Co-op Bank earns nearly all of its net interest income from Kenya where its loan book is largely tilted to non-corporate borrowers at interest rates that were higher than the current 14 per cent.

The lender has a subsidiary in South Sudan but draws 99.9 per cent of its income from the local market where corporate borrowers account for 29 per cent of its loan book.

StanChart and Barclays, which make their entire earnings from the local market, are set to record relatively smaller declines in net interest income owing to the structure of their lending.

The SIB says corporate borrowers — defined as those borrowing at an interest rate of 12 per cent — make up 41.9 per cent of Barclays’s loan book and 41.1 per cent for StanChart.