Banks set for windfall from record high rates

Co-operative Bank has posted a 7.5% profit growth to Sh18.4bn in the nine months to September.

In Summary

•The bank's net earnings grew from Sh17 billion a year earlier. 

•Besides higher income from lending, Co-op Bank also benefitted from lower operating costs.

Coop Bank Group managing director Gideon Muriuki at a past event/FILE
Coop Bank Group managing director Gideon Muriuki at a past event/FILE

Local banks are expected to reap big this financial year from increasing bank rates with the highest rate clocking 19 per cent for high-risk borrowers.

Latest data by the Central Bank of Kenya (CBK) shows that average commercial bank borrowing rates hit an 81-month high of 13.83 per cent in August, mirroring the effects of a rising interest rates environment.

This, despite the regulator retaining the base lending rate at 10.5 per cent in the most recent update.

Sector experts had projected an increase of up to 75 basis points to help the country ease circulation of the local currency, amid its depreciation against major international currencies.

The shilling has dropped close to 20 per cent against the dollar in the past one year, closing the week at 152.30.

"Investors in the bank stocks should keep their money put as they expect higher dividends in March. High rates will do wonders. That feel will be demonstrated by impressive Q3 results that have started to trickle in,'' investment banker Joel Lugano told the Star.

His sentiments are echoed by seasoned banking sector analyst Paul Wainaina who projects an average net profit growth for Tier 1 lenders at 11 per cent in Q3 and 14 per cent at the end of the year.

"All stars are aligned for the country's banking sector that has since fully recovered from shackles of global financial crisis triggered by Covid-19 and Russia -Ukraine crisis," he said.

He however warns that warring geopolitics especially Israel's activities in Gaza and flexing of muscles by superpowers might spoil the party.

Several banks are expected to issue their Q3 results including Equity and KCB Group.

Last week, Co-operative Bank of Kenya posted a 7.5 per cent profit growth to Sh18.4 billion in the nine months that ended September, driven by higher interest income from loans.

The net earnings grew from Sh17 billion a year earlier.

Co-op Bank’s total interest income increased 12.8 percent to Sh49.3 billion as the lender increased its lending to ordinary customers and the government via purchase of treasuries.

“The strong performance by the bank is in line with the group’s strategic focus on sustainable growth, resilience, and agility,” said Gideon Muriuki, Co-op Bank managing director.

"Sustainability is fully integrated in our business model that stands on the three pillars of economic sustainability, social sustainability and environmental stewardship,” Muriuki added.

The group expanded its loan book by Sh42.9 billion to Sh378 billion while its investments in government debt securities increased by Sh2.7 billion to Sh185.1 billion.

“As a bank that is predominantly-owned by the 15 million-member co-operative movement that is represented in all regions of the country, we are inclusive by design, which has enabled us to not only deliver shared prosperity today but also helped us build an awareness and prudence to avoid participation in activities that risk putting future generations in jeopardy,” said Muriuki.

Rising interest rates are expected to lift lending margins for banks, especially those that can avoid a substantial increase in their cost of funds as well as non-performing loans.

Co-op Bank’s deposit base increased by Sh835.7 million to Sh432.8 billion, while interest paid to depositors grew by Sh4.8 billion to Sh16.5 billion, reflecting the impact of rising rates.

The average rate on fixed deposit accounts across the banking sector rose steadily to peak at 8.39 percent in August, according to the Central Bank of Kenya.

Lending margins have meanwhile remained stable at about 5.4 per cent as lending rates also rose to hit an average of 13.24 percent in August.

Besides higher income from lending, Co-op Bank also benefitted from lower operating costs.

The bank’s total operating expenses shrunk by Sh629.1 million to Sh29 billion, partly due to loan loss provision falling by Sh1.5 billion to Sh4.2 billion.

The bank’s gross non-performing loans meanwhile increased by Sh10.1 billion to Sh61.9 billion. Other operating costs also fell to Sh8.8 billion from Sh9.8 billion.

Co-op Bank’s subsidiaries made positive contributions to the group’s overall results in the review period.

Kingdom Bank posted a net profit of Sh784 million —a 28.7 per cent growth from Sh609 million.

Co-op Consultancy & Bancassurance Intermediary Limited posted a pre-tax profit of Sh762.9 million, while Co-operative Bank of South Sudan returned a pre-tax profit of Sh43.5 million after factoring in hyperinflation.

Co-op Trust Investment Services Limited contributed Sh154.5 million pre-tax profit as the subsidiary’s funds under management closed the period at Sh196 billion.

The lender has continued with its local expansion strategy, growing its branch network to 193, with eight being opened this year and five having been opened last year.

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