Kenya s Banking Sector: Is consolidation in the offing after the new regulations?

Transcription

1 Kenya s Banking Sector: Is consolidation in the offing after the new regulations? Presentation by George Bodo Head of Banking Research, Ecobank Capital. October 10th, Villa Rosa Kempinsky, Nairobi

2 Composition of the Banking Sector Tier I Banks (7) Tier II Banks (12) Tier III Banks (19) KCB CfC Stanbic ABC Bank Equity Bank I&M Gulf African Bank Co-operative Bank NIC Victoria Commercial Bank Standard Chartered NBK Sidian Bank Barclays Citi Jamii Bora CBA Family Bank Development Bank DTB Bank of Baroda Habib AG Zurich Bank of Africa Guardian Bank Prime Bank First Community Bank Ecobank Consolidated Bank Bank of India Spire Bank GTBank Habib Bank Ltd Chasebank Imperial Bank Habib AG Zurich Credit Bank TransNational Bank Paramount Bank UBA Middle East Bank Fidelity Bank Dubai Bank 2

3 Kenya Within the EAC Context Figures used are in USD Billion 40 Perfomance Overview-FY2015 Total Assets Customer Deposits Customer Loans Gross Revenues Kenya Uganda Tanzania Rwanda Burundi 3

4 Some Key Verticals within the EAC Context Customer Loans/Total Assets Funded Revenues/Total Revenues NPL Ratio LDR Cost-to-Income Ratio (CIR) 90% 80% 70% 77% 74% 73% 71% 68% 60% 50% 40% 60% 44% 55% 56% 47% 30% 20% 10% 0% Kenya Uganda Tanzania Rwanda Burundi 4

5 The New Operating Environment

6 The Context. On August 24, 2016, the Banking Amendment Bill 2015 was signed into law by the President of Kenya, paving way for lending rate caps as well as floors on deposit rates. After the promulgation, it now became the Banking (Amendment) Act 2016 and took effect on September 14, As you are aware, the Act establishes a ceiling on commercial banks lending rates at 400 basis points above the base rate as set by the Central Bank of Kenya (CBK). The Act also sets a floor on deposit rates at 70 percent of the base rate (as set by CBK). The regulator came out and designated its policy rate-cbr-as the base rate for purposes of the Act. At the current CBR quantum, the ceiling stands at 14% while the floor stands at 7%. Our Economics team recently projected more policy easing space-with an expectation of a further 50bps cut, at least, before year end. Effectively, there is a strong possibility the cap could further drop. 6

7 How to Survive in a Closed Cubicle Environment In an environment where risk-pricings are capped and floors have been established on deposit rates (a closed cubicle environment),commercial banks have to adjust in the following manners: They need to match-fund their assets, at least, by half-both contractually and behaviorally. This is because they may not be able to handle resultant repricing/refinancing risks; They need to keep cost of balance sheet funding as low as possible; They also need to be as efficient as possible. In fact, we think that in the new environment, cost-to-income ratio should not exceed 40% in order for a bank to stay positive. Technology should be at the centre of this. And because interest income will no longer-driven, volumization strategies will have to gravitate around driving more non-funded income. 7

8 How have banks survived in the past 25 years? Average Cost of Funding Term Loan Pricings Overdraft Pricings Post liberalization Spreads 10 Spreads Spreads Spreads 5 Price Controls Era 0 Jul-91 Jul-93 Aug-95 Sep-97 Oct-99 Nov-01 Dec-03 Jan-06 Mar-08 Apr-10 May-12 Jun-14 Jul

9 High Levels of Interest Rate Sensitivity Figures used are in Kshs 000 Funding Liabilities Earning Assets Non-Sensitive Repriceable in over 1 year Repriceable within days Repriceable in under 90 days 0 400,000, ,000,000 1,200,000,000 1,600,000,000 Data is for the top 16 banks in Kenya as at FY2015. These 16 banks, combined, controlled over 80% of total industry assets. 9

10 Earning Assets Sensitivity to Repricings Sterilized Loan Pricings Cost of Funds 0 year1 year2 year3 year4 year5 year6 year7 year8 year9 year10 year11 year12 year13 year n 10

11 Refinancing Risks have been high Figures used are in Kshs Billion Contractual Maturity Transformation-FY2015 2,500 Customer Loans Funding Liabilities 2,000 1,954 2,035 1,714 1,500 1,134 1, Below 90-days Between 4-12 months Above 12 months Total Data is for the top 16 banks in Kenya as at FY2015. These 16 banks, combined, controlled over 80% of total industry assets. 11

12 Funding Costs: Medium and Small Banks often pay the highest price. Figures used are in Kshs Billion 100% Gross Interest Income Interest Expenses Net Interest Income 90% 80% 70% 60% 50% 40% 30% 20% 10% 30% 47% 51% 0% Tier 1 Banks Tier 2 Banks Tier 3 Banks 12

13 Efficiency: Small Banks are lagging behind. Figures used are in Kshs Billion 100% Total Net Revenues Overheads PBT 90% 80% 70% 60% 52% 58% 79% 50% 40% 30% 20% 10% 0% Tier 1 Banks Tier 2 Banks Tier 3 Banks 13

14 What adjustments must banks make?

15 Annuity Income from customer loans will contract. 100% 90% 80% Interest Income from Placements 70% Interest Income from Other Sources 60% 50% 40% 77% 71% 74% Interest Income from Financial Securities Interest Income from Loans&Advances 30% 20% 10% 0% Tier 1 Banks Tier 2 Banks Tier 3 Banks 15

16 How will the resultant gap be filled? 100% Gross Revenues Costs (Funding and non-funding) PBT 90% 80% 70% 60% 65% 50% 50% 77% 50% 90% 50% 40% 30% 20% 10% 0% Tier 1 Banks Tier 2 Banks Tier 3 Banks Sources: Ecobank Research, Central Banks 16 16

17 What s at stake? 100% Gross Revenues Costs (Funding and non-funding) PBT 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Tier 1 Banks Tier 2 Banks Tier 3 Banks Sources: Ecobank Research, Central Banks 17 17

18 How should banks go about it? CASA Purchased Funds Tier 3 Banks Tier 2 Banks Tier 1 Banks 0% 20% 40% 60% 80% 100% 120% 90% 80% 70% 79% 60% 50% 58% 52% 40% 30% 20% 10% 40% 40% 40% 0% Tier 1 Banks Tier 2 Banks Tier 3 Banks Sources: Ecobank Research, Central Banks 18 18

19 Thank you