Category Archives: Co-op

CBK Fines Banks over NYS Transactions 

The Central Bank of Kenya (CBK) has levied bank fines against five institutions over transactions relating to their handling of payments and movement of funds sent from the scandal-plagued National Youth Service (NYS).

The banks are Diamond Trust which handled Kshs 162 million, and was fined Kshs 56 million, Co-operative Bank which handled 263 million (and was fined 20 million), KCB which handled Kshs 639 million (fined 149.5 million), Equity moves Kshs 886 million (89.5 million fine) and Standard Chartered which handled Kshs 1.63 billion from the NYS, and which was fined Kshs 77.5 million.

The CBK statement read that the bank fines followed investigations into failures at the banks including; not reporting large cash transactions, not doing due diligence on customers, lack of support documents for large transactions and lapses in reporting suspicious financial transactions to the Financial Reporting Centre (FRC).

Notably missing was Family Bank that featured heavily in a prominent series of transactions of funds that originated from procurements at the NYS. It has been previously sanctioned and branch and senior staff are being prosecuted.

All the banks which handled NYS funds had been named earlier and the CBK statement added that this was not the end, with an additional group of banks set to be identified and investigated.

Kenya Banks – Super Profits Back?

The simultaneous release on Thursday morning of half-year results of Kenya’s three largest banks portrays a picture of the banks resuming their super profits streak even as the government looks set to repeal interest rate caps later this year.

But the results are deceptive in that the banks have all shown flat growth in loans, despite the growth in customers deposits which have increasingly been channelled towards funding government debt, at the expense of the private sector.

The results showed:

  • Flat growth in loans: e.g while KCB deposits are up by Kshs 40 billion this year, net loans are actually lower than December 2017. 
  • Decline in assets and capital – as the banks noted that the adjusted capital ratios were due to CBK guidance on IFRS9. 
  • NPA’s up.  
  • Growth in the diaspora and the East Africa region.
  • KCB is expected to complete  the acquisition of Imperial Bank later this year

James Mwangi CEO of Equity spoke of the bank’s total income now being ahead of where they were in June 2016 before the interest rate caps were set by Parliament, and that the June 2018  results were achieved despite losing 40% of loan interest income in Kenya. Interest rate caps which were reintroduced in Kenya in 2016 were pushed at a time when large banks were recording “super profits” and which parliamentarians attributed to them charging high-interest rates to borrowers.

Another factor has been cost efficiency improvements through digitization and a move away from fixed investments in brick and mortar. Equity also reported that 97% of customer transactions were done outside branches and these accounted for 55% of the value of transactions, and their CEO said that in future, branches will be for high-value transactions, advisory services, and cross-selling products.

With the result of the three, along with that of Barclays and Stanbic earlier this month, we have results of five of the seven largest banks in Kenya and none from the smaller banks. Last year,, the top -ten banks took over 90% of the industry profits. What does IFRS9 portend for the smaller banks?

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.

Coop Bank 2017 AGM

Cooperative Bank (Coop Bank) shareholders had their 2017 AGM in Nairobi where the directors proposed a Kshs 0.8 per share dividend as well as a bonus share for every five held.

At the AGM, their CEO, G. Muriuki, spoke of continuing the turnaround at the bank which had a Kshs 2.3 billion loss in 2001 when they had 100,000 customers – and on through 2016 when they had Kshs 353 billion of assets, Kshs 18 billion profits, 149 branches, and  6.2 million customers. The cooperative sector remains the heart and identity of the bank, and they will continue to provide services to the sector.  The cooperative movement also forms the anchor shareholding of Coop Bank with a 65% stake.

Most amazing, he said, was the digital transformation at the bank. Some years back, McKinsey had identified 60 services done at their branch that could be decentralized – and now, only 15% of transactions are done at the branch – with customers doing the bulk of transactions on mobile phones, at ATM’s, agents, and on the internet – and this had seen the Bank’s cost/income ratio reduce from 60% to 50%

At the AGM, there was also discussion on some challenges such as court cases & loan provisions, funds at held Chase Bank and hyperinflation in South Sudan which has resulted in losses. Some shareholders also asked if they could have the annual report mailed to them via post offices and also had other queries on issues like diaspora banking services, staff fraud, PesaLink, interim dividends, the bank’s share price, transport fare to attend the AGM, cyber crimes, and interest rate caps. In answering one question, the CEO said Cooperative Bank was not one of the bidders for Chase Bank as they had a presence similar to Chase and would focus on growing organically.

The  CEO also said this year marked the third bonus share issue since the bank had listed in 2008, and this was good for shareholders as the bank had grown its capital without asking shareholders to put in more money.  Coop Bank had a livestream of the AGM for any shareholders who were unable to attend the AGM, and more companies should do this for investors awareness