Here is what shaped the performance of Kenya’s banks in Q3 2020

Core Earnings per Share recorded a weighted decline of 32.4% in Q3’2020, compared to a weighted growth of 8.7% recorded in Q3’2019. As reported by most of the banks, the decline in the earnings was mainly attributable to the increased provisioning levels, as they covered for downgraded facilities, with the expectations of an increase in defaults across sectors on the back of the Covid-19 pandemic.

Asset quality for listed banks deteriorated in Q3’2020, with the gross NPL ratio rising by 2.6% points to 12.4% from 9.8% in Q3’2019, and higher than the 5-year average of 8.5%. The banking sector was also keen on restructuring loans in order to offer relief for their customers against the effects of Covid-19. The loan restructuring involved placing moratoriums on both interest and principal payments for three months to one year. As at the end of October 2020, the total amount of loan restructured stood at Sh1.4tn representing 46.5% of the banking sector loan book.

But what are the key themes that shaped the banking sector in Q3’2020?

Regulation: On March 27 2020, the Central Bank of Kenya provided commercial banks and mortgage finance companies with guidelines on loan reclassification, and provisioning of extended and restructured loans as per the Banking Circular No 3 of 2020. The loan restructuring involved placing moratoriums on both interest and principal payments between three to twelve months, in effect giving reprieve to borrowers who found it difficult to repay their loans due to the impact caused by the pandemic. Following this guidance, the banking sector has seen a total of Sh1.1tn, representing 38.6% of the total Sh2.9tn banking sector loan book, being restructured as at August 2020, according to data from the September 2020 Monetary Policy Committee (MPC) Meeting.

The table below highlights some of the major banks that have disclosed the amount of loans they have restructured so far;
Consolidation: Consolidation activity remained one of the key highlights witnessed in Q3’2020 as players in the sector were either acquired or merged, leading to the formation of relatively larger, well capitalized, and possibly more stable entities. Major M&A’s activities witnessed during the third quarter of 2020 included: Co-operative Bank Keny, on 25th August 2020, completed the 90% acquisition of Jamii Bora Bank and rebranded it to Kingdom Bank Limited. The transaction that had started in March for a 100% purchase of the Bank at Sh1.1b, was completed in August after receiving all the approvals, with Cooperative Bank varying its initial offer of 100% stake to a 90% stake.

Equity Group Holdings completed the 66.5% stake acquisition of the Banque Commerciale Du Congo (BCDC) at a cost of $95.0m (Sh10.3b). Initially, the deal was to cost $105.0m (Sh11.4b), however factoring in the adverse effects of the Covid-19 pandemic on the two economies, the two parties agreed to reduce the amount to $95m (Sh10.3b).

I&M Holdings plc issued a cautionary statement to its shareholders on its intention to acquire 90% of the share capital of Orient Bank Limited Uganda (OBL). Subsequently in the fourth quarter, the shareholders have given the approval to proceed with the acquisition.

KCB Group, on November 25 disclosed that it had entered into an agreement with Atlas Mara Limited (ATMA) to acquire 62.1% stake in Banque De Populaire du Rwanda (BPR) in Rwanda and 100% stake in African Banking Corporation Ltd Tanzania (ABC Tanzania). Key to note, Equity Group had previously entered into a binding agreement in April 2019 with Atlas Mara on the acquisition of banking assets in four countries (Rwanda, Tanzania, Zambia and Mozambique); 62% of the share capital of Banque Populaire du Rwanda (BPR); 100% of the share capital of Africa Banking Corporation Zambia (ABCZam) Ltd; 100% of the share capital of Africa Banking Corporation Tanzania (ABCTz); and, 100% of the share capital of Africa Banking Corporation Mozambique Ltd (ABCMoz). In the 62.1% BPR acquisition, KCB will pay a cash consideration based on the net asset value of the BPR at completion of the transaction using a price to book multiple of 1.1x. Key to note, according to the latest BPR financials, the bank had a book value of Rwf46.6b (Sh5.2b), and thus at the trading multiple of 1.1x, we estimate KCB will have to part with Sh5.7b. The Group also separately intends to make an offer to acquire the remaining shares from the respective shareholders.

Below is a summary of the deals in the last 5-years that have either happened, been announced or expected to be concluded:

The number of commercial banks in Kenya has now reduced to 38, compared to 43 banks 5-years ago. The ratio of the number of banks per 10 million population in Kenya now stands at 7.1x, which is a reduction from 9.0x 5-years ago, demonstrating continued consolidation of the banking sector. However, despite the ratio improving, Kenya still remains overbanked as the number of banks remains relatively high compared to the population.

From the above table, it can also be concluded that for the third quarter of 2020, core Earnings Per Share (EPS) recorded a weighted (32.4%) decline, compared to a weighted growth of 8.7% in Q3’2019, the sector recorded a weighted average deposit growth of 23.1%, faster than the 11.0% growth recorded in Q3’2019 and, interest expense, on the other hand, grew faster by 8.2%, compared to 4.3% in Q3’2019. Cost of funds, however, declined, coming in at a weighted average of 2.9% in Q3’2020, from 3.1% in Q3’2019, owing to the faster growth in average interest-bearing liabilities, an indication that the listed banks were able to mobilize cheaper deposits.

Average loan growth came in at 15%, faster than the 11.6% recorded in Q3’2019, but slower than the 47.4% growth in government securities, an indication of the banks preference of investing in Government securities as opposed to lending due to the elevated credit risk occasioned by the pandemic.

Interest income rose by 10.8%, compared to a growth of 4.5% recorded in Q3’2019. Despite the rise in interest income, the Yield on Interest Earning Assets (YIEA) declined to 9.5% from the 10.3% recorded in Q3’2019, an indication of the increased allocation to lower-yielding government securities by the sector. The decline in the YIEA can also be attributed to the reduced lending rates for customers by the sector, in line with the Central Bank Rate cuts. Consequently, the Net Interest Margin (NIM) now stands at 7%, 0.7% points lower than the 7.7% recorded in Q3’2019 for the whole listed banking sector, and,

Non-Funded Income grew by 2.1% y/y, slower than 15.8% growth recorded in Q3’2019. The performance in NFI was on the back of declined growth in fees and commission of (7.9%), which was slower than the 22.6% growth recorded in Q3’2019. The poor performance of the growth in fees and commission can be attributed to the waiver on fees on mobile transactions below Sh1, 000 and the free bank-mobile money transfer. Banks with a large customer base who rely heavily on mobile money transactions are likely to take the biggest hit.


Based on the current tough operating environment, 2020 performance in the banking sector will be shaped by the following key factors:

Increased Liquidity due to lower Cash Reserve Ratio (CRR): The Monetary Policy Committee (MPC) during their April 29 2020 meeting lowered the Cash Reserve Ratio (CRR), which is a fraction of total customer deposits that the commercial banks have to hold with the Central Bank, by 100 bps to 4.25% from 5.25%. The reduction is projected to have injected approximately Sh 35.2b in additional liquidity, to commercial banks for onward lending to distressed borrowers.

The reduction was a first one since July 2009. The MPC during their November 2020 MPC Meeting highlighted that Sh32.6b, representing 92.7% of the Sh35.2b had been utilized by the banking sector to offer reprieve to their customers as well as support lending in the sectors that have been hard hit by the pandemic such as Tourism, Manufacturing as well as Real Estate. Low CRR ratio is expected to improve the banking sectors liquidity and as such, banks will have more money to loan to businesses and individuals as well as invest in other businesses. Additionally, given that a low CRR translates to a low amount held in the CBK at no interest, we expect this to lead to a decline in the interest rates charged on loans by the sector,

Lower profitability: With the large amount of restructuring and reclassification of loans witnessed in Q3’2020, we expect the bank’s core source of revenue, which is interest income, to be negatively affected in the short term. Given the relaxation of the loan interest payments and the borrowers preference to long-term tenor extensions on their loan holiday to between 9-12 months, the banks interest income is set to drop. Banks are also not lending aggressively due to higher credit risk. We foresee a slower growth in loans in FY’2020 and thereafter if the pandemic is to persist further with banks turning to less risky investments such as government securities which rose by 47.4% faster than the 15.0% rise in loans in Q3’2020,

Lower Net Interest Margins (NIM): The increased investments by banks in government securities as opposed to lending, coupled with the increased liquidity in the money market have seen the yield curve readjust downwards. As such, we foresee the sector’s Yield on Interest Earning Assets (YIEA) continue to decline in tandem with the decline in the yields on government securities. Additionally, we foresee a continued decline in the sector’s NIMs in the FY’2020, most especially for banks reducing their lending rates for customers in line with the CBR cuts,

High Loan Provisioning: The risk of loan defaults remains elevated despite an improvement in the operating environment in line with the relaxation of Coronavirus measures. We foresee increased provisioning in the sector as compared to FY’2019, given the lagged recovery process from the pandemic. Additionally, we expect the higher provisioning requirements as per the IFRS guidelines to further subdue the profitability of the banking sector during the year,

Cost Rationalization: Given the expected low revenues and increased automation, banks are expected to continue pursuing their cost rationalization strategies. A majority of banks have been riding on the digital revolution wave to improve their operational efficiency. Increased adoption of alternative channels of transactions such as mobile, internet, and agency banking, has led to increased transactions carried out via alternative channels and out of bank branches, which have been reduced to handling high-value transactions and other services such as advisory. Banks reduced front-office operations, thereby cutting the number of staff required and by extension, reducing operating expenses and hence, improving operational efficiency,

Lower Non-Funded Income: With the new regulations put in place by the Central bank to cushion citizens against the effects of the COVID-19 pandemic, banks’ non-interest income was depressed during Q3’2020, growing at a weighted average growth of 2.1%, slower than 15.8% growth recorded in Q3’2019. Notably, the CBK announced in June 2020 that the measures put in place to facilitate mobile transactions such as the free bank-mobile money transfer and the waiver on fees on mobile transactions below Sh1, 000 had been extended to December 31 2020. As such, we foresee the sectors NFI growth to be muted in FY’2020 and to be outperformed by the interest income growth in the short term. Key to note, historically, the sectors NFI growth outperformed that of interest income, thus, allowing the banks to remain profitable amid a rigid regulatory environment, and,

Expansion and further consolidation: With the Microfinance – Bill 2019 of increasing the minimum on core capital requirements still at its pilot stage more mergers and acquisitions would enable the unprofitable and/or smaller banks to manage the requirement and be able to increase profitability through cost efficiency and deposits growth.

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