The banking sector is among the sectors that have continued to grow despite a tumultuous macro-economic environment as the resilience in the period leading to the 2023 half-year results shows. Business Hub spoke to Ronny Chokaa, an analyst at investment bankers Genghis Capital for pointers on some of the standout points the lenders experienced in the review period.
1. Interest earnings
Earnings from interest continued to grow despite the high cost of funds and uncertainties, with risk-based credit pricing continuing to sustain the earnings momentum. This has propelled interest incomes across the sector upwards of 10 per cent year-on-year basis, with banks implementing a differentiated pricing structure to all its clients based on credit and sovereign risk.
2. Rising yields
Rising yields on government securities have supported lender’s earnings, with the authorities often resorting to the markets for funds to bridge its budget deficit, often borrowing at higher rates. This has consequently lifted the bond portfolio re-investment incomes for the commercial banks.
3. Forex trading
Tier-1 banks with a regional presence have leveraged increasing confidence and trade activities in their regional markets to propel their foreign exchange (forex) trading earnings. Because of the synergies in these markets, they have been able to facilitate cross border transactions within the same franchise, locking in gains within their own houses.
4. Operating expenses
Banking costs within the period remained much rationalised because of changing consumer trends. Consumers are now shifting to digital banking solutions as opposed to the traditional cash. Some lenders like the Equity Group have transited over 90 per cent of their transactions to the digital platforms, rationalising staff and the cost of operating brick and mortar branches.
5. Non-performing loans
Most banks are now contending with rising non-performing loans (NPLs), given the prevailing macro-economic operating environment where businesses have a hard time generating revenue because of the declining consumer demand. This has impaired the ability to service their payments on time and contributed to a spike in the NPLs ratio, with the industry rate coming at 14 per cent at the half year period. The highest of them was KCB at 18 per cent, while Absa was the lowest at 9.6 per cent.
6. Loan loss provisioning
Despite favourable top lines due to banks re-pricing of loans and implementing risk-based credit pricing, there has been a corresponding rise in NPLs, forcing banks to provide more in expected credit losses. KCB for instance increased their loan loss provision by two and half times, a reflection of the Stanbic’s Purchasing Managers Index- a barometer of business sentiments- which has been deteriorating for the last six months in a row, below the 50 per cent mark.
7. Government securities
The interest rate environment has piled pressure on the value of government securities held by commercial banks. Rising interest rates means declining value in government securities. As much as the re-investment income element has been rising in government yields, when it comes to the balance sheet, the value of government securities has been declining when looked at from the fair value perspective.
8. Balance sheet
Lending to the private sector has not grown as fast in terms of total loans. This is a reflection of the rising yield payout by the government that has been compellingly more attractive for banks to lend to the government than the private sector, a factor that was more than expected.
9. Deposits
Tier-1 banks with a regional presence are shoring up deposits into their merger and acquisition activities. Equity and KCB Groups have penetrated the Democratic Republic of Congo, KCB Group is already in Rwanda, a market Equity Group is also eyeing. The performance across the region has been relatively robust, which has been positive for customer deposits because of the perceived confidence people place on the Tier-1 lenders.
10. Cash
Banks have been less willing to deploy cash, as opposed to the prior period when they were shoring up deposits to support future prospective investment opportunities. The opportunity cost of holding idle cash has been rising and they are now better off investing in government securities or even lending to the real economy than holding onto the idle cash.
