Large Banks to benefit more from interest rate capping

Africa Banking & Finance Business Business Featured Investment Opinion Regional

Large banks will be the greatest beneficiaries of the new lawcapping bank interest rates, according tonew research released by Britam Asset Managers.

According to the report,the recently implemented interest rate caps law is expected to squeeze medium and small banks’ margins more than those of large banks, ultimately leading tolower funded income for the medium and small banks.

760af276ee6f9b46d3f3a54c804b7c7d_xlAs a result, Large banks will continue to capitalize on their strengths to drive growth in non-funded income, ramping up cross selling of products to existing clients in order to derive maximum value.

Most big banks have a wider distribution networks which encourage their customers to carry out more transactions, for example ATM withdrawals, thus earning more fee income. They are also more active in driving other income growth from investment banking, stockbroking, bancassurance as well as active trading of government securities.

As at 2015, there were 7 large banks with a market share of 58.2%, 12 medium banks with a market share of 32.4% and 21 small banks with a market share of 9.2%.

Despite controlling 58% of banking assets, the 7 largest banks command 70% of the sectors profits indicating that they are able to better sweat their assets and grow shareholder value, profits are expected to decline.

Small Banks rely on expensive lending to make up for higher funding costs. SMEs are generally receiving credit between 16.4% and 23.5% from the traditional banking channels, well above the prescribed minimum of 14.0%. Small banks have to undercut larger banks in less risky segments in order to diversify their loan portfolios.

“Medium and small banks suffer higher Non Performing Loans due to their higher exposure to riskier Micro, Small and Medium Enterprises loans. Asset quality will be a key focus going forward as banks try to keep cost of risk low cushion their bottom line,” said Ken Kaniu, CEO,Britam Asset Managers during a media briefing in Nairobi.

Banks are also expected to increase focus on growing Non-funded income to cushion bottom lines and capital buffers from the impact of margin erosion.

They are likely to step up efforts to make alternative channels more attractive to customers in order to improve efficiency as they seek to encourage more customers to use the alternative channels in order to lower their overheads per transaction.

“We expect credit growth to recover marginally in the near-term from the current lows as banks look to drive volume growth to make up for the decline in Net Interest Margins. However, the long-term outlook of credit growth remains uncertain as banks will have to reassess their risk affinity within the new rate envelopes for new origination,” said Kaniu.

The company predicted increased uncertainty in loan pricing since the new framework requires immediate repricing of all loans once the base rate is adjusted.

Banking consolidation is expected inthe larger banks, and they will be expected to pass on the benefits of financial inclusion and efficiency to customers through lower lending rates. The research predicted the profitability of the banking sector to decline in the short term (12-15 months) as the banks adjust to the new normal of lower interest income.

Medium and small banks will be the hardest hit since they were enjoying lower margins, with growth expected to continue from 2018, albeit not at the astronomical levels observed in the past.

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