CBK mulls over raising banks’ core capital

Commercial banks will be hard-pressed to meet new capital requirements which the Central Bank of Kenya is considering.

The fresh capital adequacy requirements will require banks to raise their minimum capital above the Sh1 billion threshold — the fifth increase in a row since 2010. The plan would see banks create a buffer against risks such as macroeconomic turbulence locally or in global economies.

The CBK is considering raising the capital requirements for Kenyan banks to be at par with those in South Africa, Egypt, Angola, and Nigeria.

The move, which may force banks to retain more of their shareholder funds or go into debt, is aimed at positioning them well to tap the growing opportunities arising from ongoing big infrastructure projects and the natural resources being exploited, without facing substantial credit risk that may affect the industry.

CONSTRAINT FINANCING

“However, the Sh1 billion (about $11 million) minimum capital requirement may actually constraint financing potential of some large banks,” CBK said in its latest Financial Sector Stability report.

Of the four countries cited, Angola has the least minimum capital requirement at Sh2 billion ($23 million), followed by Egypt with Sh6 billion ($68 million). South Africa’s minimum capital is Sh9 billion ($102 million) while Nigeria’s is Sh8 billion ($91 million).

Currently, most of the Kenyan listed banks have excess capital ratios and generate a high return on equity. However, they may have to withhold a chunk of their shareholder earnings, opt for cash calls, or exploit the debt market to meet the new regulations.

“The rise in capital ratios will force banks to go for a cash call sooner or later. In order to grow, banks also have an option to reduce the dividend payout ratio, if they are high, so as to invest in the capital ratios or requirements,” Africa Investment Bank analyst, Mr Parshv Shah, told Smart Company.

CAPITAL BUFFER

The CBK issued revised guidelines on prudential capital adequacy ratios for commercial banks with a capital buffer of 2.5 per cent above the previous ratios, effective January 2014. The rules saw the minimum capital for commercial banks raised to Sh1 billion from Sh700 million.

“The strong growth that the banking industry has exhibited over recent years has been supported by adequate capital. The industry’s shareholders’ support has been steadily growing over the years, as data from the Central Bank confirms,” said the Kenya Bankers Association research director, Mr Jared Osoro.

The ratio of core capital to total deposits increased from 17 per cent in 2012 to 19 per cent in 2013 as banks’ capital base funded by retained earnings and injection of fresh capital increased, CBK noted in the Financial Sector Stability report.

“All banks, except one in the small peer group, met the minimum core capital base of Sh1 billion as at December 2013. The bank in question was affected by increased provisions for loan losses and the regulator took prompt corrective action to ensure full compliance,” the regulator said.

The prudential guidelines the CBK released in 2013 also required banks to conduct stress tests regularly and submit results to the regulator on a quarterly basis. This is to enable the CBK to monitor and continuously engage the banks on appropriate plans for mitigating potential risks and vulnerabilities in the market.

DIG DEEPER

An analysis done by Mr Francis Mwangi, the head of research at Standard Investment Bank in July this year, indicates that the existing CBK prudential guidelines would require eight listed banks to increase their tier-one capital by a total Sh76.2 billion (the highest being Sh15.9 billion by the Kenya Commercial Bank and the least being Sh5 billion by NIC) if they are to deliver the same growth they have experienced in recent years under the new capital adequacy ratio rules.

The proposed rules could further hurt their earning prospects, with shareholders having to dig deeper into their pockets and cope with lower dividend payout to meet the guidelines.

“Universally as the regulatory body increases capital ratios, the bank’s return on equity is expected to fall. The expected fall is on the back of more reserves (capital) invested in the business,” Mr. Shah says.

Some analysts argue that Kenyan listed banks have excess capital ratios.