This archive report was first published on 4 October 2019.
Kenya's banking sector had a slower growth in the first half of 2019 compared to the previous year, with a 3.8% increase, down from 6.4% in the same period in 2018.
According to a report by Cytonn Investments, the sector's growth was largely attributed to the slower expansion of funded income segments, which recorded a relatively slower growth, affected by declining yields in both loans and government securities.
Despite the slower growth, the report noted that the banking sector still managed to record a 9% average increase in core Earnings Per Share, compared to a growth of 19% in the first half of 2018.
Deposits growth was 8.6% slower than the 10% growth recorded in the first half of 2018, while interest expenses increased at a slower pace of 5.3%, compared to 12% in the first half of 2018.
However, there was good news on loan portfolio, with average loan growth coming in at 9.8%, which was faster than the 3.8% recorded in the first half of last year, indicating an improvement in credit extension to the economy.
Government securities on the other hand recorded a growth of 12.1%, which was a slower growth rate compared to 14.9% in the first half of 2018.
The report also noted that the interest rate cap has not achieved its intended objectives of easing access to credit and reducing the cost of credit, and suggested that it should be reviewed to spur economic growth.
According to the report, medium Small Medium Enterprises (SMESs) have continued to struggle in accessing the much-needed credit, and Cytonn suggests that they form a lobby group to engage directly with policy makers and legislators.
The investment firm also urges the promotion of competing sources of financing, which it says will reduce the overreliance on bank funding in the economy.
Any hopes that the banks had of a stronger deposits growth in the second half of 2019 may not be achieved after the Central Bank of Kenya (CBK) announced that the just-concluded demonetisation exercise of Sh1,000 notes had a shortfall of Sh7.3 billion.
However, Cytonn Investments says that all is not lost in the second half of 2019 and expects the banks to continue focusing on asset quality management.
The report also noted that the banks are expected to focus on revenue diversification to grow transactional income via alternative channels in the Non-Funded Income (NFI) such as agency banking, internet and mobile technologies.
The average growth in NFI for the first half of 2019 was an impressive 16.5%, compared to 6.9% recorded in 2018.
The lenders are also expected to institute operational efficiency through restructuring, which may lead to staff layoffs as increased usage of mobile and internet banking records a significant growth in the lucrative sector.
With the increased emphasis on anti-money laundering and fraudulent transactions, Cytonn says banks are expected to monitor transactions by streamlining their operational processes and procedures.
To increase the market share, banks are expected to form strategic partnerships, which is critical for the strong players in the market as struggling banks that don’t have a niche market will get acquired.
