Kenyan banks’ profitability could drop by double digits next year due to the fall in lending rates and higher costs of mobilising deposits, according to a prediction by Citibank analysts.
The research wing of the American-owned commercial bank has said that although Kenyan banks will see increase in the volume of new loans, there would be a 12 per cent drop in profit after tax due to net interest margin fall as higher deposit rates would continue to persist even though the lending rates would drop considerably.
The Citi research report dated December 11, 2012 said that on a very conservative basis it believed that the market should price in a two-percentage point contraction in customer spreads for the financial year 2013 from 12 per cent to 10 per cent over the nine-month period this year.
In recent years, Citigroup’s research department has focused on Kenya’s corporate and national economy and made bold and, sometimes, controversial predictions.
In July, the Citibank team reported that Kenyan banks had blown-up their profits by under-providing for bad debts. This statement has prompted the capital markets regulator to call for a ban on sell-buy-back, which is a form of bond trading.
In the report which was released on Tuesday, Citi said that the impact of the contraction in the bank’s profit margins would be a fall in net interest income over of nine per cent in 2013.
The analysts had predicted that the total interest income on loans would drop by 18 per cent and bad debts provision would rise by five per cent. The General Elections could also impact the GDP growth and keep it low, resulting in keeping the loan volume low.
The Citi report stated that performing well could be challenging in an election year as the real GDP in Kenya had averaged 2.4 per cent in election years over the past 30 years.
‘Bloomberg‘ financial analysts, while differing with Citi, have predicted that Kenyan listed banks’ net profit will rise by 17 per cent in 2013 as a result of high lending and falling interest rates. The major difference between the two is that Citi has predicted the spread (difference between deposit and lending rates) will be to the customer’s advantage, but there would be substantial risks from non-performing loans in the coming year arising from existing loans.