A 2019 first quarter report on bank performance released Monday shows that banks have had an overall increased performance as they recorded improved profitability, in a relatively tough operating environment.
As per the report by Cytonn investment, digitalisation (mobile banking), consolidation and regulation are the key drivers for the improved performance in the banking sector in Kenya 2019.
According to Cytonn Investment analyst Ian Kagiri, regulation remained a key aspect that affected the banking sector, with the regulatory environment evolving and becoming increasingly severe, including several indicators among them is the banking sector charter.
Kagiri further noted the Central Bank of Kenya (CBK)’s proposition to introduce a Banking Sector Charter in 2018, which will guide service provision in the sector.
The Charter which came into effect in March 2019 aims at instilling discipline in the banking sector in order to make it responsive to the needs of the banked population.
The analyst also added that there has been an increase in Earnings per Share (EPS) in the year 2019 as compared to the year 2018.
“Kenya Listed Banks recorded a 12.2 percent average increase in core Earnings per Share (EPS), compared to a growth of 14.4 percent in Q1’2018, with the relatively lower performance attributed to the base effect, as the sector was coming from a relatively poor performance in Q1’2017,” Kagiri added.
He further added that Cytonn expects banks to continue employing prudent loan disbursement policies and also tighten their credit standards in order to address the deteriorating asset quality evidenced by the rising non-performing loans.
“We expect to see mergers and strategic partnerships between banks, aimed at creating larger entities with sufficient capital base to pursue growth as well as increase their respective competitive edge and pricing power,” said Kagiri.
However, the analyst added that tough operating environment has made it hard for the smaller banks that do not serve a niche.
“Therefore, as has been the case recently, we are likely to see more consolidation activity, as larger banks acquire the smaller players in the sector, who are constrained in capital, as they seek to grow their market share, penetrate new market segments and expand their product offerings,” explained Kagiri.
He continued: “This sector is expected to facilitate a market-driven transformation of the Kenyan banking sector, thereby considerably improving the quality of service provided, as well as increase the access to affordable financial services for the unbanked and under-served population.”
He added that the residual effect of this partnership will be a stable sector with well capitalized players, able to catalyse economic growth as well as withstand any systemic shocks.
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Cytonn Investments Investment Associate Caleb Mugendi said that deposit growth came in at 11.0 percent, faster than the 9.4 percent growth recorded in Q1’2018. Despite the relatively fast deposit growth, interest expenses rose by 2.5 percent compared to 11.4 percent in Q1’2018 indicating that banks have been mobilizing relatively cheaper deposits.
