RATING

Rate cap weighs on bank earnings and loan growth in Kenya – Fitch

Gross loans grew by only five on average for Kenya's eight largest banks in 2018, compared with six per cent in 2017, seven per cent in 2016 and 17 per cent in 2015

In Summary

• The rating firm expects asset-quality pressures to persist throughout 2019 with the average NPL ratio for the large banks likely to reach 10 per cent by end-2019.

• The rating agency said emerging markets such as Kenya rely on banks to lend to the real economy, and losses start to rise when certain industries are starved of credit.

A general view shows people walking past the Central Bank of Kenya headquarters building along Haile Selassie avenue in Nairobi, on October 9, 2017. /REUTERS
A general view shows people walking past the Central Bank of Kenya headquarters building along Haile Selassie avenue in Nairobi, on October 9, 2017. /REUTERS

Kenyan banks' earnings and loan growth will remain subdued unless the country's lending rate cap is removed, Fitch Ratings has said in a new report.

According to the New York based rating agency, gross loans grew by only five on average for Kenya's eight largest banks in 2018, compared with six per cent in 2017, seven per cent in 2016 and 17 per cent in 2015.

Their non-performing loans (NPLs) ratio rose to 8.9 per cent at end-2018 from 6.6 per cent at the end-2017, with the effect of rising impairments amplified by low loan growth.

 
 

‘’The cap has hit banks' earnings, with the spread between loan and deposit rates more than halving, although customer fees and other non-interest income continue to underpin profitability,’’ Fitch said.

It said that while  the cap has helped some borrowers and limited the profits banks can make from them, it has also had unintended side-effects, including dampening loan growth, despite its aim to make credit more accessible and affordable.

The rating agency said emerging markets such as Kenya rely on banks to lend to the real economy, and losses start to rise when certain industries are starved of credit.

"We expect asset-quality pressures to persist throughout 2019 with the average NPL ratio for the large banks likely to reach 10 per cent by end-2019," says Fitch.

It says capital metrics for most banks are good by international standards but sensitive to asset-quality deterioration given relatively high net impaired loans.

‘’The Fitch Core Capital (FCC) ratio was 16-18 per cent for seven out of the eight largest banks at end-2018, but unreserved NPLs were equivalent to 14 per cent of FCC,’’ the rating agency said.

Kenya capped loan interest rates in September 2016 at four per cent above the prevailing central bank policy rate (currently nine per cent) in response to social and political opposition to high interest rates being charged to borrowers.

 
 

The rate cap has caused banks to shy away from lending to perceived riskier sectors as it has limited their ability to price correctly for risk.

This has contributed to a slowdown in lending to the private sector, particularly to SMEs, which are the bulk of Kenya's economy.

Lending to the sector dropped to historical low of 2.4 per cent in 2017 but has been rising every month, hitting 5.2 per cent in July from 4.4 per cent in May according to CBK.

Kenya's High Court declared the cap unconstitutional in March 2019 but suspended the ruling for 12 months to allow parliament to re-examine the law.

Fitch said it does not expect an immediate repeal. It foresees a substantial modification to the law.