Category Archives: CBK

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.

Spire Bank Capital Injection

Spire Bank shareholders will hold an extraordinary general meeting at the end of November 207 to approve an increase in bank capital that has been eroded by recent losses at the bank.

At the November 27 EGM, shareholders will approve the creation of 100 million new shares, worth Kshs 500 million that will be allocated to Equatorial Commercial Holdings. Kenyan banks are to have a minimum core bank capital of Kshs 1 billion, and as at June 2017, Spire’s capital was down to Kshs 1.6 billion and the bank had a half-year loss of Kshs 307 million coming on the back of a 2016 loss of Kshs 967 million. Spire had Kshs 13 billion assets, Kshs 6.4 billion loans, and Kshs 7.6 billion deposits as at June 2017. But interest income and total income at the half-year was sharply down from that in June 2016 which could point to their performance trend for the end of 2017.

In 2015, Mwalimu SACCO one of the country’s largest credit societies bought out and rebranded the former Equatorial Commercial Bank as Spire. Equatorial had itself been formed from a merger between Southern Credit and Equatorial banks in 2010. 

Mwalimu SACCO has Kshs 37 billion in assets and Kshs 3 billion profit in 2016 and has over 70,000 members as owners.  This is the second bank capital injection by Mwalimu at Equatorial after another with the buyout. The shares will be allocated among Equatorial Commercial Holdings which owns 98% of Spire bank has shareholders including Mwalimu National Holdings (75%), Yana Towers (10%), A.H. Butt (8%), Yana Investments (6.75%, and who also own 11% of CBA) and N.N. Merali (0%).

SBM Offer for Chase Bank

Update: Jan 5 2018 

Central Bank of Kenya (CBK) and Kenya Deposit Insurance Corporation (KDIC) announce the receipt and acceptance of a Binding Offer from SBM Holdings Limited (SBM) with respect to Chase Bank (Kenya) Limited (In Receivership) (CBLR).

The offer still needs to be executed and operationalised, and it is expected that this transaction will inter alia ensure the transfer of 75 percent of the value of deposits currently under moratorium and the transfer of staff and branches of the existing CBLR operations. Non-moratorium depositors will continue to have full unrestricted access to their funds.

Original: October 11 2017 – On Monday, October 9, the Central Bank of Kenya (CBK) issued a statement about their receipt of a non-binding offer from the SBM Holdings (State Bank of Mauritius – SBM) for parts of Chase Bank.

It came after another meeting last Friday to update Chase Bank depositors about the progress of the expression of interest (EOI) with depositors, and which was then followed by some news articles that prompted some alarm over the ‘loss’ of deposits at Chase from the SBM takeover.

The statement mentions SBM’s offer to acquire some assets (i.e. loans) that are matched (i.e. equal) to some liabilities (i.e. customer deposits at Chase)  and went ahead to mention that there would be a substantial recovery of deposits and retention of staff and branches of Chase Bank.

The bank, which was expected to be a quick receivership, and concluded in April this year, now has a hole of Kshs 35 billion and the estimate is that SBM will support the recovery of 75% of the deposits as at when Chase Bank was closed in April 2016. One third of the funds will be available on January 1, another third will be available in a savings account that will earn interest (it was a sore point for depositors to hear that their funds in the bank that was known for great rates had not been earning interest since it was closed in April 2016), and a third will be available in installments over the next three years.

The final amount will be recovered by suits and fraud cases against the defaulters who may include directors and managers (insiders) at the bank.

While CBK had earlier reported that 12 banks had replied to the EOI (three Kenyan banks, four foreign banks, and five financial consortiums), the standard quotes the CBK Governor, Dr. Patrick Njoroge, as saying “All the investors in the end indicated that they were not interested in taking up the bank, save for one who was only interested in carving out some assets and liabilities and not an entire acquisition.

SBM has a substantial Government of Mauritius shareholding, and this will be the second bank that SBM is buying in Kenya, after they took over Fidelity Bank and one story is that their rescue of  Fidelity was tied to some assurance that they would also get Chase, ahead of other bidders.

SBM will do due diligence on what branches and staff it wants to retain going forward. The Chase recovery seems similar to one that Imperial Bank shareholders had initially proposed when they found a hole at their bank – one of staggered access to funding, immediate, then some spaced over three years.

Barclays Kenya Previews IFRS9

Barclays Kenya held a workshop session in Nairobi today to explain about the coming of IFRS9, a set of new accounting standards that will replace IAS 39 on January 1, 2018. which will have a great impact on banks, their capital, customer assessment and ultimately their profits.

Some of the highlights of the day:

Compliance Impact

  • Even as banks are still digesting the impact of interest rate caps, along comes IFRS9.
  • All institutions will adopt the impairment standard in 2018.
  • One challenge will be on how to report for impairment: Banks will have to do three sets of accounts, one for impairment according to Central Bank of Kenya (CBK) rules, one for the Kenya Revenue Authority to calculate taxes on profit after impairment, and another for Impairment according to IFRS9. This makes compliance a costly affair.
  • IFRS9 is data intensive, so auditors will be concerned with the quality of data and reconciling it to bank financial statements. They will have to trust that management is providing the right data to make decisions, and if not, they will engage with the bank board, then the bank regulator (CBK).
  • Banks need systems that are able to capture a lot of this customer data and products and come up with impairment models.
  • Banks will use predictive analytics, and big data to manage risk in customer lending.  

Customers

  • IFRS9 brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them
  • Expect a change from the current practice of using credit reference more from the negative  perspective (a blacklist of borrowers) to a good one (banks will check to see who has been paying on time and offer them better rates)
  • Collection strategies will become very important, given the financial impact of IFRS9 for defaults over 30 days and 90 days.
  • Kenyan bankers are working to enable customers to get access to their own data and shop for products that will be easy to compare across different banks. This will be an enhancement of the loan calculator that the bankers association rolled out earlier.
  • IFRS9 seems to give an incentive for banks to lend shorter duration loans. 

    IFRS9 gives incentive to shorter loans

Profits

  • With IFRS9 banks estimate the credit risk of an instrument, at the point of origination – so losses are recognized earlier.
  • Previously, under IAS 39. banks only recognized a loss once an event occurred e.g customer does not pay a loan for many months. Now banks will have to expect and estimate some defaults and recognize the loss upfront.
  • Under IFRS9, accounting provisions are expected to be higher than the current regulatory provisions.

Financial Statement Changes

  • From day one of IFRS9, there will be an impact on retained earnings and a reduction in Tier 1 capital at all banks
  • Under IFRS9, letter of credit, financial guarantees, performance guarantees, unused credit cards, non-traded government bonds will also be used to calculate impairment.
  • Studies show that IFRS9 running concurrently with IAS 39 can impact on the capital of a bank by between 25 to 100 basis points.
  • Are government securities still risk-free for local traders and investors? Not so under IFRS9. But since Kenya has never defaulted on debt so IFRS9, provisioning will be minimal compared to bonds of some other nations

Way Forward

  • On 1 Jan 2018, international accounting standard IFRS9 will replace IAS 39.
  • Kenyans banks are at a fairly satisfactory stage in terms of getting ready for IFRS9 with Tier I banks, and those with global parentage at an advanced stage compared to local indigenous banks e.g. Barclays has been working on IFRS9 for two years
  • ICPAK (Institute of Certified Public Accountants of Kenya) is working on. rules for the consistent and uniform application of the IFRS9 standard and these will be ready by the end of October.
  • ICPAK will have other forums to further explain IFRS9 as will the Central Bank. 
  • CBK will come up with new classification of loans to replace the current measures of normal, watch, sub-standard, loss etc..

Cement, Sugar, Governments contribute to Bad Debts in 2017

In a press conference this week the Central Bank of Kenya (CBK) governor spoke about non-performing assets i.e bad debts and highlighted manufacturing, real estate and, trade sectors.

This comes after the half-year 2017 bankers credit survey released by the CBK noted that the ratio of gross non-performing loans to gross loans increased from 9.5 percent in March 2017 to 9.91 percent in June 2017. The increase in the gross non-performing loans was mainly attributable to a challenging business environment

  • Non-Performing Loans: Generally, the commercial banks expect an increase in the levels of NPLs in the third quarter of 2017 with 42 percent of the respondents indicating so. This expected rise in NPLs is attributed to the industry’s perception of increased political risk in light of the upcoming general elections.
  • Credit Recovery Efforts: The banks expect to tighten their credit recovery efforts in eight out of the eleven sectors.

The Governor said that in manufacturing, the bulk of the Kshs 5 billion of bad debts increase could be attributed to a sugar company, two cement companies, and a plastics firm, while  In real estate, Kshs 3.9 billion was due to two projects – one a golf course, and the other was a housing one. But he added that, for all of these projects, the banks that had financed them were working to resolve the loan performance.

On trade, he said that Kshs 2.8 billion increase of bad debt loans was spread across many banks and that a lot of it relates to delayed payments by government – both national and county ones – to suppliers.