The impact of interest rate caps in a tough economic environment and hyper-inflation in South Sudan takes a toll on the KCB Group’s interest income despite a 14.3% increase in net loans and advances to customers.
The Group posted a pre-tax profit of KShs. 6.59 billion in the first quarter ending March 31, 2017. In full year 2016, the Group reported KShs. 3.4B loss on net monetary position due to the accounting for hyperinflation in South Sudan. This entire amount was accounted for in Q4 2016. Adjusting for the specific loss on net monetary position attributable to Q1 2016 translates to a 5% growth in pre-tax profit in Q1 2017 over same period in 2016.
The adverse impact of the interest capping law was cushioned by a 27% reduction in interest expense, 20% growth in non-interest income and prudent cost management that limited cost growth to below inflation.
Non-interest income was up 20.3% from KShs. 4.6 billion in the first quarter of 2016 to KShs. 5.6 billion within the same period this year, underscoring the growing importance of income derived from alternative revenue channels.
KCB Group CEO and MD Joshua Oigara said the full effect of the law capping interest rates resulted in an interest income dip of 12% during the quarter from KShs. 16.0 billion in Q1 2016 to KShs. 14.1 billion this year. The Interest expense declined by 27% from KShs 5.2 billion to KShs 3.8 billion occasioned by reduced cost of funds. Further, the Group posted significant improvement in Forex income which was up 72.1%; total assets up by 8.8% and shareholder funds up 20.6%.
2017 Q1 Results Key Highlights
- Net Interest Income down by 4.7% from KShs.10.86B to KShs. 10.34B
- Forex Income increase by 72.1% from KShs. 747M to KShs. 1.29B
- Total Operating Income up by 2.7% from KShs. 15.48B to KShs. 15.91B
- Total Assets improved by 8.8% from KShs. 556.8B to KShs. 605.8B
- Net Loans and Advances up 14.3% from KShs. 345.9B to KShs. 395.5B
- Customer Deposits increased 7.9% from KShs. 423.4B to KShs. 456.8B
- Shareholder funds grew by 20.6% from KShs. 83.9B to KShs. 101.2B
“We have witnessed an increasingly challenging operating environment across all markets. In Kenya, the interest rate caps have made it difficult to price for risk whereas some of our subsidiaries are experiencing high inflation and shortage of foreign currency,” said Mr. Oigara.
KCB Group’s non-interest income currently accounts for 35% of the Group’s total operating income and is expected to be the growth driver going forward. The Group has pegged its future on its Fintech strategy that rides on a digital platform to provide seamless services for its customers. “The future lies in leveraging technology to drive efficiencies in our operations in order to serve our customers better with relevant products that meet their expectations,” said Mr Oigara
KCB Group continues to face challenges in South Sudan, due to the hyperinflation situation in the economy. The continued depreciation of the currency (South Sudanese Pound) has had a negative impact on our results. “The Group continues to monitor South Sudan’s overall performance and appropriate optimization measures are being executed,” said Mr. Oigara.
KCB has made significant advances in adopting technology resulting to more than 79% of the transactions performed outside the branches. Mobile banking transactions have increased by 37%, Agency banking increased by 50% and Point of Sale transactions increased by 33% in Q1 2017 compared to the same period last year. Over the same period, branch transactions have reduced by 27%.
“This year, we will make investments to increase mobile banking customers to over 15 million, grow the agency network to over 20,000, leverage on Biashara Smart for SMEs and affordable housing through home loans” Mr. Oigara added.
The bank’s liquidity position stood at 38.7% in the quarter which was 18.7% above the CBK’s statutory minimum requirement. The Group’s capital strength remained robust with a total capital of KShs. 97.2 billion in the first quarter of 2017 up from KShs. 81.4 billion in 2016.
The Bank’s core capital as a proportion of its total risk weighted assets was 14.1% compared to the Central Bank of Kenya statutory minimum of 10.5%, a further indicator that the Bank is on a firm capital footing. Overall the bank’s total capital as a proportion of its risk weighted assets stood at 17.0% within the first quarter of this year compared to 18.1% in the first quarter of 2016.
“We need to continually manage our capital and risks to keep the business growing while delivering on our targets. Our focus will be on generating higher growth, and over the next three years, we will be seeing a bigger and more efficient bank” said Mr. Oigara.