Banks rob customers to pay shareholders

Increasing lending rates, paying depositors peanuts and slashing provisions for non-performing loans are what commercial banks fell back on to grow profits in a year the economy was wriggling from recession.

The fact that a large portion of the banks’ revenues came from interest paid by borrowers explains why banks refused to heed Central Bank of Kenya’s signals to lower borrowing rates. Not even after the CBK warned that high interest rates would further slow down growth.

The banks are themselves the victims of the economic slowdown as borrowers failed to repay loans on time, resulting in huge cuts in profitability due to rising bad debts.

The financial results also confirmed that the industry’s slow pace in embracing mobile banking has negatively impacted incomes. Majority registered a decline in fees and commissions due to reduced transactions on accounts as customers turn to mobile money transfer to push most of their deals.

Rising interest rates

Little wonder that some banks are turning to mobile banking to allow customers access accounts using phones and transact other things.

In the 12 months to December 2009, the sector recorded a combined Sh48.3 billion in pre-tax profit. Overall, commercial bank average base lending rate rose from 14.78 in January 2009 to 14.98 in January 2010, while the average saving deposit rate dropped from 2.1 per cent to 1.75 per cent resulting to spread of 13.2 per cent.

On simple arithmetic, favoured by the Central Bank but loathed by the banks, it means bankers were making 13.2 percentage points in profit by just collecting money from the public and lending it.

However, banks counter this view saying the cost of money is higher than just the rate paid to the depositors.

It includes the risk that the borrower may not pay and that the depositor may also return for her savings before it is paid back by the borrower.

They also fault the method of computing the average deposit rate, saying over half of their money is sourced from current accounts that do not pay interest. Aggregating these to get the average saving rate then distorts the market average.

An analysis by African Alliance, an investment bank operating in Africa, gives an insight on how the top five banks managed to remain profitable.

Barclays Bank of Kenya Ltd returned 12 per cent growth to Sh9 billion in pretax profit in 2009, with the investment banks saying the profitability was mainly driven by “improved net interest margin following lower weighted average interest rate on deposits, continued cost containment and lower loan loss provisioning.”

The bank paid its depositors an average of 1.8 per cent, 80 basis points lower that it paid last year to better its net interest margin to 10.7 per cent. Interest income, though, declined by 1.7 per cent year on year as the bank scaled down private sector lending to lower yielding government securities.

The bank also suffered from a stable forex market, which cut income from forex trading by 14.6 per cent, while reduced transactional activities saw the fees and commission income fall by 5 per cent. The bank’s stock of non-performing loans increased by 15 per cent compared to 2008 levels. Barclays, however, slashed its provision for non-performing loans by 60 per cent.

“The impairment charge is currently at 0.6 per cent to net loans down from 1.1 per cent in 2008,” African Alliance analysts say. A non-performing loans provision is a charge to the profit and loss account which, when made, reduces profitability. A provision is normally made to reflect a bank’s own assessment of the risk in its stock of loans.

Operating costs declined by 3.1 per cent year on year as the bank focused on consolidating its expanded branch network. With 95 per cent of its branches having broken-even, the cost to income ratio dipped 130 basis points year on year to 59.3 per cent.

Standard Chartered Bank Kenya recorded a 43 per cent increase in pretax profit to 6.7 billion, to rank second in term of absolute profitability.

“Growth was mainly driven by a 26.2 per cent increase in net interest income on the back of higher spreads and a 790 basis points improvement in cost efficiency,” says African Alliance.

The higher spread – the difference between average lending rate and average rate paid on deposits – helped the bank record a better net interest margin of 20 basis points. Like BBK, stable forex market resulted to decline in non-interest income.

Efficiency through technology in its banking helped Stanchart improve its cost-to-income ratio by 790 basis points to 41.5 per cent – the best in the industry – mainly due to a decline in staff expenses.

African Alliance says it stands to benefit the most from branchless banking, mostly due to its small branch network. It also maintained its policy on non-performing loans provision, retaining it at 1 per cent of its net loan advances despite its gross non-performing loans declining by 15 per cent.

Kenya Commercial Bank recorded a 5 per cent growth in pretax profit to Sh6.3 billion but “continued pressure from mobile money transfer facilities and lower forex volatility presented challenges to the biggest bank in terms of branch network.

The two saw the bank’s “other incomes” fall by 35.1 per cent, resulting to a ratio of non-interest income to total income declining by 730 basis points.

The bank slashed its bad debt charge by 57.5 per cent representing 1.3 per cent of net loans while its stock of non-performing loans increased by 48.1 per cent.

The bank’s biggest challenge was, however, containing costs as it increased its presence in the region. The regional expansion resulted in an 11.7 per cent increase in operating costs. As a result, the cost to income ratio was up 1120 basis points to 66.9 per cent.

The bank is now in Tanzania, Uganda, Kenya, Rwanda and Southern Sudan, and has also been considering extending its services to Democratic Republic of Congo (formerly Zaire).

The expansion has also gnawed at the bank’s core capital relative to its lending and as result it will be seeking an additional Sh15 billion from its shareholders in second half of 2010 subject to approval by CMA, NSE and the CBK.

Equity Bank recorded 5 per cent improvement to Sh5.3 billion in pretax profit.

“The higher than expected earning per share growth was due to a lower bad debt charge at 1.6 per cent of net loans,” African Alliance says.

The bank’s net interest income growth remained strong, supported by higher NIM (+20 basis points year on year, -60 basis points q/q) on interest earning assets.

The bank’s branch expansions as it increased its presence in the regional markets in Southern Sudan and Uganda and investments in new technology resulted in a 42.8 per cent growth in operating costs. As a result, the cost to income ratio was up 780 basis points to 60.1 per cent cutting on its profitability.

Bad loans

Its stock of non-performing loan went up 91.1 per cent from the 2008 level to Sh4.8 billion. Bad loans provision remained flat representing 1.6 per cent of net loans against 2.3 per cent in 2008.

“Although the non-performing loan ratio has increased, the impairment charge has not increased commensurately,” African Alliance noted.

Trailing the top five, Co-operative Bank recorded 11.2 per cent growth in profitability to Sh3.7 billion, driven by high growth in non-funded income and reduced bad loans provisioning.

The bank, which is preparing to enter Uganda and Southern Sudan, recorded an “impressive rise in interest income driven by stable weighted average interest rate on lending and 17.7 per cent growth in advances.”

The bank expects to commence operations in southern Sudan through a joint venture with the Sudanese government. Under the agreement, Co-op Bank will own 70 per cent and the government will own 30 per cent.

Its stock of non-performing loan declined by 19.6 per cent for the year while its loan loss provisioning to net advances rose 20 basis points. The net loans ratio, however, declined to 8.5 per cent from 12.5 per cent in 2008.

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