Category Archives: bank service

Citi’s outlook on Kenya Banking

Citi Bank has been producing some insightful research reports on companies they watch like KCB, Equity and Safaricom for their investment clients.  The latest one (Will it stay or will it go? — Awaiting clarity on the Banking Act) is an outlook on Kenya banking, based on the financial results that all banks released for the third quarter of 2017 which is exactly a year after Kenya’s Parliament passed a law, which the President then signed, that capped all Kenya banking loan rates at a maximum of 14% per year.

Citi’s findings:

  • Despite the Banking Act of 2016, Kenya’s leading banks maintain among the highest margins (8~9% NIMs) and returns (ROTE 20~23%) of any frontier market, coupled with strong capitalization, a stable currency and an improving political environment.
  • While there is little clarity on the future of the Banking Act, we acknowledge that many investors are interested in that “what if?” case if the legislation was to be amended, and hence provide a sensitivity analysis to gauge the upside from changes to the regulatory regime.
  • The Kenya banking sector is fairly concentrated with the top 5 banks controlling just under half of the assets (48%), KCB is the largest bank with a 14% market share, followed by Equity Bank and Cooperative bank with 10% each. A similar story for deposits, with the top 5 banks accounting for 50% of the market, KCB is the largest player with a 15% share, followed by Equity Bank at 11% and Cooperative bank at 10%.

The Citi report notes that KCB who grew loans by 9% in the third quarter despite the interest rate cap has a diverse client base that makes it easier for the bank to navigate the challenging environment. KCB has expressed interested in acquiring smaller banks like National Bank, as it also it pulled back from volatile South Sudan in May 2017, where it only retains a license.

Equity has put brakes on lending, with flat loans growth in the third quarter. The bank’s Equitel is now Kenya’s second largest mobile money platform after Safaricom’s M-Pesa, with 4% of customers and 23% value of transactions. Equitel appeals to customers as it has no internal charges. Meanwhile, mobile loan growth fell in the half year at Equity as the bank tightened lending standards, while KCB’s grew. Still, Equity disbursed 1.6 million mobile loans through Equitel in the first half of 2017.

The Citi report also notes that KCB lags Equity in the digital push, with mobile phones accounting for 70% of transactions at Equity and  57% at KCB. Elsewhere, 86% of all customer transactions at Co-op Bank are done on alternative delivery channels mainly mobile banking, ATMs, internet and agency outlets. Another finding was that the large banks have benefitted from the flight to safety by depositors following the collapse of three smaller banks in 2015-16.

The Citi Report looked at the Kenya banking interest rate caps under three scenarios with the first  being that the caps are extended even further to bank charges. The report mentions that the Kenya banking regulator, the Central Bank (CBK), had rejected 13 out of 16 commercial bank applications to increase charges, all pointing to tough times for banks in a slow loan growth environment. The second scenario was that the interest rate cap remains as is, and the third scenarios was that the caps are loosened by excluding some loan segments which will allow banks to lend at higher rates to riskier segments like SME’s, retail and micro-finance clients. However, Citi finds that the interest rate caps are not going away soon, and they are here to stay, probably for a few years. 

Finally, the Citi report (published on 19 November), rates KCB as a ‘buy’ with a target share price of Kshs 47 (current price on December 8 is Kshs 43), while they are neutral about Equity Bank which they value at Kshs 38.5 per share (current price is Kshs 41) as they think it is fairly valued.

Deloitte on African Art and Finance

The value of African art can grow tremendously over the next decade with investment and support from buyers both within Africa, and others who live beyond the continent, as well as from African art schools, governments, museums, galleries, art professionals and banks to stimulate and support more interest in African art.

These are some of the findings from the Art & Finance Report 2017 that was unveiled at Deloitte’s 10th Art and Finance conference at the Italian Stock Exchange in Milan this week and which estimated that the value of art owned by Africans collectors was $12.7 billion in 2016 and that it  could grow to $20 billion by 2026. This still accounts for less than 1% of the global art market currently estimated at $1.6 trillion with an annual turnover of $50 billion.

Some key findings of the report which looked at the global art markets include:

  • The art market should be self-regulated and there is great support for art to be part of wealth management offerings to customers at more private banks.
  • Banks need more specialists to properly value and manage art markets.
  • Art can be used as collateral, enabling art collectors and galleries to realize liquidity without having to make unfavorable sales to meet short-term cash-flow needs. See this on how to borrow against art.
  • Art as an investment class poses risks that are no different from others that banks manage and have to guard against, including vices like price manipulation, insider trading, money laundering and terror financing.
  • The top categories in the global art market are  “post-war & contemporary art”, followed by “modern & impressionist art”, “Chinese & Asian art” and ” jewels & watches”.

Some excerpts from the report on the African art market include:

  • International dealers and auction houses like Bonhams and Sotheby’s are seeing a gradual shift in the African contemporary art buyer base from mainly African art collectors to a more international and diverse group of art collectors.
  • London experienced a 12.5%  rise in African art auction sales between 2015 and 2016, with Bonhams controlling a 65% market share.
  • Sotheby’s London joined the African art auction trend in 2017 with its first auction focused purely on African contemporary art. It achieved total sales of over $3.6 million and 79 of the 116 lots were sold.
  • In 2017, record-breaking hammer prices recorded at auction for contemporary art were achieved by Nigerian artist Njideka Akunyili Crosby, whose work sold for less than $100,000 at auction in 2016. However, less than a year later, the artist’s piece “Drown” sold for a record-breaking US$1.1 million at a Sotheby’s auction and a few months after that, her 2012 painting “The Beautiful Ones” sold for US$3.1 million at a Christie’s London auction.

There is currently an inter-section of art, wealth, and technology with the possibility that bitcoin / block-chain can be used to assist banks and financiers with tools to help with transparency authentication, copyrights and ownership of art objects and there are already platforms such as Blockai, Ascribe.io, Chainmark, and smArtchain etc. in use.

The greatest demand for African art is currently from high net worth individuals in Nigeria and South Africa, which are the two largest economies in Africa. The report also notes that there is increasing demand from corporations such as the Nigeria Stock Exchange

Elsewhere In Kenya, Stanbic was working on investor management portfolio offerings that include wine and African art, while Nigeria has Access Bank in Nigeria. There are also other innovations coming up in African art and finance from leading banks and galleries in Kenya, South Africa and Europe.

Agency Banking in Kenya in 2017

Agency banking which has been around for seven years, is going to see a transformation of branch banking as banks roll out more products to alternative delivery channels.

Agency banking outlets extend banking services in Kenya.

According to Central Bank of Kenya statistics on the distribution of agents, 87% are with 3 banks – Equity Bank with 25,428 agents, Kenya Commercial Bank  with 12,883 and Cooperative Bank with 8,856 agents. Bank customers in Kenya transacted Kshs 734 billion in 2016, up from 442 billion in 2015).
Agents are big and deliver dozens of services that including SACCO transactions, payment of school fees, NHIF, KRA and utility bills – which bank customers can now do from their neighborhoods and which are accessible for longer hours than bank branches. While cash deposits and cash withdrawal are the bulk of the transactions, agents also processed Kshs 14 billion for payments of retirement and social benefits, and another Kshs 6 billion to utilities
Crucially, agents are the link between cash and the mobile banking/online banking worlds.

Last year Co-op reported that their branches did 15% of bank transactions with the rest being done on alternative channels, and yesterday Equity Bank disclosed that, this year, non-branch transactions are  91% of all monetary transactions – which are now happening on self-service and third-party platforms at variable costs – compared to the fixed costs of branches.

Equity is rolling out agency banking in Uganda, and the Central Bank of Kenya has had knowledge exchange partnerships with teams from Tanzania and Malayisa who were studying agency banking in Kenya. Equity CEO James Mwangi also said that Equity Bank agents share between Kshs 3-5 million in commissions every day as he pondered that the bank did not need new staff and could give probably back 70% of the physical space they currently have.  Their next step will be to digitize corporate banking to enable services to be done on alternative channels, the way retail banking has been done.

Interest Cap Impact and Bank Resilience

The end of August marks the deadline for Kenyan banks to publish their unaudited half-year results (January to June 2017). Those of most banks are done and there are some trends, some concerns and some resilience areas seen in what’s been a challenging year for the sector that has for a long time been seen as one that earns super-profits for its shareholders.
The interest rate capping bill was signed last August, and while its initial impact was not fully seen in the 2016 results, one year later these can now be interpreted. The law has had far-reaching impacts on different banks, their performance, operations and strategic directions. Overall, there has been a decline in bank results due to a mix of interest rate caps and digitization, as phones have taken over from branches as the main point for the bulk of customer transactions.
Some observations: 
  • Less traditional banking: there has been a decline in assets as more banks have turned to digitization to cut costs, and increase efficiency. At Equity, deposits were flat between March and June, which also marked the third straight quarter of overall loan declines
  • Lower interest income: e.g. 45% down at Family Bank, plunging it to a half-year loss
  • A buildup of government debt: Equity now has Kshs 105 billion, KCB 100 billion, and Diamond Trust 83 billion.
  • More closure of branches e.g. Barclays, Standard Chartered, Bank of Africa and Ecobank. But it’s not all gloom as some banks like Cooperative and Diamond Trust have announced plans to open new branches.
  • Job cuts have been announced at KCB, Standard Chartered, Barclays, Family Bank, National Bank of Kenya, NIC Bank, Ecobank, Bank of Africa, First Community Bank and Sidian Bank.
  • With nowhere to go, banks are giving money back to shareholders. Some banks have reduced capital, while KCB with profit flat at the half-year will pay a rare interim dividend confirming analysts’ view that some banks will return more capital to shareholders at a time when they have curtailed lending to riskier customers. 
  • Big banks are okay, small ones, not so much:

  • Losses, not profits. E.g. Family and Sidian, went into the red at the half year, despite layoffs and closures, while Ecobank managed to stay above water. These have mainly been attributed to reduced interest income.
  • Declines in loans and deposits at tier ii banks, and T1 equity
  • Mortgage declines: Buy Rent Kenya said that there has been a major drop in the number of mortgage applications over the past year and that those that the cap was meant for are currently the biggest losers as banks are skeptical to give credit to most individuals as they now have numerous terms and conditions that are not easy to meet.
  • Local banks converting debt to equity at Kenya Airways: This has been a reluctant move, with three banks delaying the Ksh 23 billion conversion that will see a consortium of Kenyan banks become the second largest shareholder at the airline.
  • Equity announced they will no longer lend unsecured loans to salaried Kenyans, cutting off a product feature that has brought them great popularity.
  • New business lines:  Banks have looked to other sources of income this year. Co-operative Bank which has net interest income and pre-tax profit that was down 10% in the half-year, received regulatory approval from the Central Bank of Kenya to enter into a joint venture with Super Group, a leading South African leasing company and together they will target major infrastructure projects, government vehicle leasing, oil & gas exploration, and other leasing opportunities. Elsewhere, National Bank entered a partnership with World Remit to allow remittances to be paid directly into bank accounts at NBK, Barclays is funding solar mini-grids in Turkana while Standard Chartered bucked the trend on Equity and will step up unsecured lending. 
  • Non performing loans (NPA’s) are up: At NBK, they are up to 29 billion, half the 57 billion loan book. NBK is awaiting a Kshs 2.9 billion NSSF (shareholder) loan to shore up capital.
  • NPA’s have also gone along with increased provisions e.g. 1.8 billion at Stanbic at the half-year.

Standard Chartered Kenya launches Video Banking

Standard Chartered launched video banking in Nairobi today. Already used in Asia, Kenya will become the first of their banks in Africa to roll out the service to its customers.

Standard Charted is currently Kenya’s 5th largest bank by assets, and has been in the country since 1911 and serves retail, corporate and institutional clients. CEO Lamin Manjang spoke of their “digital by design” investments, in which they use technology to enhance customer experiences while improving on the banks’ cost efficiency. He said “ Almost all transaction done at the branches are available through other means” and listed recent innovations they have done including – upgraded their platform, a new mobile banking app, fingerprint login, ATM’s that accept cash deposit ATM, and now video banking.

Whether in Singapore or Malindi, customers will be able to have secure video chats with agents located at the banks’ headquarters in Chiromo, Nairobi, share screens, exchange documents, do their banking and get advice, especially on investment and wealth management products and services. It is available to all customers, Monday to Friday from 9 a. to 6 p.m. Video banking is currently only on desktop computers, but they plan to extend it to mobile devices in the future.

The chief guest was the country’s  Cabinet Secretary for Information, Communications and Technology , Joe Mucheru, who spoke on the government’s new cyber security bill as he urged banks and companies to invest in backups of critical data, upgrade their operating systems and anti-virus software and use of cloud services. “If you’ve gone through the agony of ransomware, investing in backups is not a big issue.”