Category Archives: asset finance

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.

Matatu IPO

There was a small advert in the Nation this week for a private placement to raise Kshs 600 million ($7.5 million) as investments in the public service vehicle (PSV) transport business.

The promoters, PSV Investments, say they have already invested in PSV’s, commonly known as matatu’s, through transport companies, savings & credit societies (SACCO’s), and individual owners. They are selling 6 million shares at 100 shillings each, with a minimum investment of 5,000 (~$62) for individuals and 100,000 (~$1,250) for institutions, and the Vice Chairman is Dickson Mbugua who’s often on TV defending the Matatu industry as an official and a spokesman. It opened on May 17 and closes on July 3.

The PSV business is one which has had difficulty getting organized investments because if the poor reputation of the business. This is because of the reckless driving habits of drivers, gangs involved in management, insurance claims & losses.

(this matatu ran me off the road this morning, and I had to drive on the pavement to avoid an accident)

Nevertheless, matatu owners are able to obtain loans from some banks but who limit their exposure by financing less than they would for an individual e.g. where a bank may finance 80% or higher of a vehicle cost, for a matatu that’s only about 50% with the owner paying the difference. In some cases they also shorten the repayment cycle to weekly installments, instead of monthly, to prevent diversion mismanagement of cash as a matatu generates (and spends) most of is cash on a daily basis.

SACCO’s have a reputation for running the best matatu businesses, and listed transport company, Express Kenya, has also invested in the PSV business via KBS and Citi Hoppa, as detailed at last year’s invested in PSV business, as discussed at their 2009 AGM.

Private placements are riskier in terms of entry and exit, and I’m dealing with two unique placement cases now: one with an investor who wants to exit from a minority shareholding, but at a greater price than the majority shareholder will pay and another placement in which the promoters have been incommunicado for six months after urging investors to buy into a company. It’s not clear if the CMA is aware of this or if there is a transaction advisor or prospectus for the company.

Motoring moment: asset finance personified

nice poster here from Lunch over IP on urban transport solutions

The traffic crunch in Nairobi has gotten worse in the last week since 1/3 of the city’s commuters had restrictions placed on their access to downtown Nairobi.

It’s fait to say that over ¾ of cars from KAP___ onwards (cars registered in the last five years) are financed with asset or bank loans – so they are a reflection of the amount of credit in the economy.

But the traffic crunch will continue unless some serious measures are taken as there are few new roads or new parking spaces coming up in the city

What are some solutions?
– Better public transport as the image above shows.
– Restriction on vehicle imports/registrations; But bad for the economy, encourage corruption
– Restrictions on asset finance lending; but bad for banks
– Restrictions on vehicle use e.g. only use vehicles ending with odd number on one day, even the next: but favors the rich (with more than one car) and will encourage fraudulent license switching
– The India way (as adopted by Uganda) and small town in Kenya which is to have motorbikes as taxis. This would be great for those who work in the upper hill area
– Car pooling, temporary parking meters, new capital city? The list is endless