Business Daily (Nairobi)
Bd Reporter
29 December 2011
Kenyan banks are on course to make super profits on the back of slower increase in deposit rates compared to their lending levels, Central Bank of Kenya data show.
Banks’ interest spread–the difference between average lending and average deposit rates–stood at 12.73 per cent in November compared to 10.23 per cent in June.
This comes in a period when banks had increased their lending rates by an average of five per cent in November on what they attributed to expensive deposits and tightening of monetary policy.
“Most of them have returned very good results, mainly on the back of higher interest spreads, because deposit rates have increased at a lower proposition compared to the lending rates,” said Francis Mwangi, an analyst at African Alliance.
The CBK data indicate that banks increased their lending rates at a faster rate than they paid depositors in what is likely to stoke pressure on the need to control Kenya’s borrowing and savings charges.
To this end, Members of Parliament have launched a fresh bid to pass a law that will regulate lending rates and fix the minimum deposit rate at 70 per cent of the CBR – the rate at which the Central Bank lends to commercial banks.
This could place deposit rates at 12.6 per cent based on the current CBR of 18 per cent if the Bill sponsored by Rangwe MP Martin Ogindo becomes law.
Banks have made Sh80 billion pre-tax profits in the 11 months to November, according to the Central Bank of Kenya (CBK), reflecting a growth of 21.2 per cent in the same period last year.
CBK did not provide the growth in the lenders loan book, but analysts reckon that the lenders benefited from the higher spreads and increased lending.
The widening spread looks set to lessen the impact of the reduced lending on banks’ profit next year as it emerged that lending seemed to have flattened between September and October on expensive credit.
On average, lending rates have increased to 18.48 per cent in November from 13.91 per cent in June while deposit charges have increased to 5.75 per cent from 3.68 per cent over the same period.
Deposit rates on wholesale deposits, however, increased to about 12 per cent from six per cent early in the year, bankers led by KCB chief executive Martin Oduor-Otieno said.
The high deposit rate regime is set to benefit high-net worth investors, especially pension fund managers who have suffered from the volatile fixed income market and the bearish Nairobi bourse.
This is a departure from the past when deposits ranked as the worst performing assets class in 2010 compared to property, government paper and the equities market.
This is best captured in the bankers earning report card in quarter three that show the lenders benefited from declining cost of funds (deposit rates) to lift their profits.
The drop in the cost of funds to banks is best captured in KCB’s quarter three results showing that the bank spent Sh2 billion on deposits compared to Sh2.7 billion in a similar period last year. This came despite growing its deposits to Sh252 billion in September from Sh193 billion in September 2010.
Barclays Bank paid Sh433 for deposits in the nine months to September compared to Sh914 million in the same period last year, but the trend is expected to shift under the current interest rate regime.
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