The Banking (Amendment) Act 2015 has drawn both plaudits and critics since its introduction in Q32016. The amendment stipulates a deposit and loan pricing framework, with (i) a cap on lending rates at 4.0% above the Central Bank Rate (CBR), and (ii) a floor on the deposit rates at 70% of the CBR. There was a mixed view on the impact of capping interest rates, with some looking at it as being able to make loans accessible to most Kenyans, while others viewed the introduction of the rate cap as being detrimental to the economy. We wrote severally on the matter, and also an article summarizing our view at the time: Interest Rates Cap is the Kenyas Brexit Popular but Unwise. Now that it is months after the law came into effect, we have seen some activity aimed at looking at the impact that the capping of interest rates has had so far on the economy. In January 2017, the International Monetary Fund (IMF) expressed concerns about interest rate capping and its negative effect on private sector credit growth and banking sector earnings, noting that it may be necessary to repeal the act as maintaining the same would end up taking a toll on Kenyas financial stability, whereas the Central Bank (CBK) has come out and stated that it is finalizing a study on the effects of the law and its impact on the economy, while working closely with the Kenya Bankers Association (KBA). With all this happening, this week we seek to analyze the impact of the interest rate caps on the economy thus far and whether it will be sustainable to maintain the Banking (Amendment) Act 2015.
The latest data from the Central Bank (CBK) indicates that private sector credit growth slowed to 4.3% for the 17th consecutive month in December 2016, and subsequently to 4.0% at the beginning of 2017, way below the government set target of 18.3%. While it is expected that private sector credit growth will stabilize at current low levels, we cannot fully attribute it to the interest rate caps, bearing in mind private sector credit growth had slumped for the 13th consecutive month, to 5.4% in August 2016, when the interest rate caps bill was signed into law. CBK has attributed the slow-down in credit growth to structural factors in the banking sector, evidenced by increasing levels of non-performing loans and subsequent provisioning, as opposed to monetary policy decisions. Despite this, it is clear that the enactment of the Banking (Amendment) Act 2015 has not served to help the situation on credit access as was expected by policy decision makers. According to CBK, the share of loans to corporates increased relative to small businesses and personal loans since the capping of interest rates, with the number of loan applications received by banks increasing between September and December 2016, and the average maturity of these loans shifting to the shorter term. However, loan approvals declined by 6.0% between December 2016 and February 2017. The fourth quarter of 2016 also saw a 4.7% decline in savings accounts following a 9.6% decline recorded in Q32016, which indicates the continued re-classification of savings accounts into checking accounts by commercial banks, following the capping of interest rates.
Below is a chart highlighting the performance of private sector credit growth before and after the Banking (Amendment) Act 2015:
Rate cap came into effect in August 2016 when private sector credit growth was at 5.4% as highlighted above
During the MPC meeting held in March, the committee noted that the available data at the time was inadequate to make a conclusion as to the impact of the Banking (Amendment) Act 2015 on the banking sector and the economy in general. However, breaking down the NII over the quarters of the year, it becomes evident that while the general performance of NII in the banking sector was better than expected over the whole of 2016, the fourth quarter of the year saw 6 out of the 11 listed banks record the lowest quarterly NII margin, with 3 relatively unchanged during the quarter and only 2 banks, Diamond Trust Bank and I&M Holdings, posting the best margin in Q42016.
Listed Banks Quarterly NII (Kshs bn) |
||||
Bank |
Q1'2016 |
Q2'2016 |
Q3'2016 |
Q4'2016 |
Standard Chartered Bank Kenya |
4.9 |
10.0 |
15.0 |
19.4 |
KCB Group |
11.5 |
22.5 |
36.1 |
47.0 |
Diamond Trust Bank |
4.6 |
9.6 |
14.7 |
20.1 |
Equity Group |
10.4 |
21.2 |
32.3 |
41.8 |
Barclays Bank |
5.4 |
11.1 |
16.9 |
22.3 |
Cooperative Bank |
6.8 |
14.5 |
22.4 |
29.5 |
Stanbic Holdings |
- |
5.5 |
- |
10.9 |
I&M Holdings |
3.4 |
7.2 |
10.9 |
15.5 |
Housing Finance Group |
1.0 |
2.1 |
3.1 |
3.9 |
NIC Bank |
3.0 |
6.1 |
9.4 |
12.2 |
NBK |
2.3 |
4.4 |
6.6 |
8.0 |
Total |
53.2 |
114.1 |
167.3 |
230.7 |
Average |
5.3 |
10.4 |
16.7 |
21.0 |
Difference in Quarterly NII and Q4 Effect (Kshs bn) |
|||||
Bank |
Q1'2016 |
Q2'2016 |
Q3'2016 |
Q4'2016 |
Q4 Effect |
Standard Chartered Bank Kenya |
4.9 |
5.1 |
5.0 |
4.4 |
Negative |
KCB Group |
11.5 |
11.1 |
13.6 |
10.9 |
Negative |
Diamond Trust Bank |
4.6 |
5.0 |
5.1 |
5.4 |
Positive |
Equity Group |
10.4 |
10.8 |
11.1 |
9.5 |
Negative |
Barclays Bank |
5.4 |
5.7 |
5.8 |
5.5 |
Neutral |
Cooperative Bank |
6.8 |
7.7 |
7.9 |
7.1 |
Neutral |
Stanbic Holdings* |
- |
- |
- |
5.4 |
Neutral |
I&M Holdings |
3.4 |
3.8 |
3.7 |
4.7 |
Positive |
Housing Finance Group |
1.0 |
1.1 |
1.0 |
0.8 |
Negative |
NIC Bank |
3.0 |
3.1 |
3.3 |
2.8 |
Negative |
NBK |
2.3 |
2.2 |
2.1 |
1.4 |
Negative |
Total |
53.2 |
55.5 |
58.7 |
57.9 |
|
Average |
5.3 |
5.5 |
5.9 |
5.3 |
|
* Difference between half year |
|||||
Given now that 3 banks, NIC Bank, Stanbic Bank and KCB Group have released Q12017 results, the effects of interest rate capping on the banking sector are becoming more apparent as the banks posted 3.9%, 9.3% and 1.9% declines in core earnings per share (EPS), with NII dropping by 8.4%, 12.4% and 4.7%, respectively.
Following the Banking (Amendment) Act 2015, the banking sector has taken proactive measures aimed at increasing operational efficiency in response to the challenging operating environment, such as laying off staff, closure of branches, reviewing operating hours for some branches, or outright sales in the case of Tier III banks. Barclays Bank has been the latest bank to report laying off staff, with 171 employees laid off in 2016, following reports that KCB Group laid off 223 employees within the same period. This brings to 11 the number of banks that have announced downsizing plans since the implementation of the interest rate cap as shown in the table below:
Kenya Banking Sector Restructuring |
|||
|
Bank |
Staff Retrenchment |
Branches Closed |
1. |
Sidian Bank |
108 |
- |
2. |
Equity Group |
400 |
- |
3. |
Ecobank |
- |
9 |
4. |
Family Bank |
Unspecified |
- |
5. |
First Community Bank |
106 |
- |
6. |
Bank of Africa |
- |
12 |
7. |
National Bank |
Unspecified |
- |
8. |
NIC Bank |
32 |
- |
9. |
Standard Chartered Bank Kenya |
300 |
- |
10. |
KCB Group |
223 |
- |
11. |
Barclays Bank |
171 |
- |
2017 being the year in which the full impact of the Banking (Amendment) Act, 2015 will be felt, and as highlighted in our Cytonn Weekly #16-2017, we are likely to witness banks push for efficiency gather pace to balance off the expected reduction in absolute profitability going forward as they shy away from physical branches model, which are very expensive compared to other alternative channels such as digital platforms.
While the capping of interest rates has rationalized interest rate spreads in the banking sector, it has led to challenges such as (i) locking out of SMEs and other high risk borrowers, who cannot fit within the 4.0% risk margin, from accessing credit, with banks preferring to lend to government, (ii) the continued slump of private sector credit growth, slowing to 4.0% in the first quarter of 2017, which is primed to adversely affect GDP growth for 2017, (iii) widespread lay-offs in the banking sector as banks adjust to the challenging operating environment brought about by the current regulatory framework, as well as in other major sectors of the economy, which is bound to take a toll on the unemployment levels in the country, reported at 39.1% in 2016, and (iv) straining small banks who effectively have been shut out from the interbank market and now have to mobilize funds at rates higher than what they are getting now and can only lend out within the stipulated margins. It is clear from the above that the effects of interest rate capping, while yet to be fully felt, are more disastrous than productive with the cons far out-weighing the pros, and the onus is on policymakers to arrest the situation before it gets out of hand, impacting negatively on the economy. There is, however, an opportunity for structured financial products and private equity players to come in and provide the much needed capital by SMEs and other businesses to grow, as the opportunities remain really promising on a risk adjusted basis.
The Banking (Amendment) Act 2015 has done more bad than good on the economy thus far, and if the situation is not arrested, could impact negatively on the economy.
- It has failed to live up to initial expectations of cheaper and more access to credit there is simply no evidence of cheaper and more access to credit, and if anything, credit growth has continued to decline. Credit growth is now at 4.0% compared to 5.4% when enacted and way below the policy target of 18.3%.
- Cost rationalization measures are primed to see continued lay-offs in a challenging operating environment.
-----------
