Kenya’s Biggest Bank Sees Rate Caps Staying Until at Least 2019

NAIROBI (Capital Markets in Africa) – Kenya’s biggest bank reckons limits on interest-rate charges that have weighed on profit will be around for at least another year.

“There are a lot of conversations happening and I have not seen anything today that says that we are ready to move,” KCB Group Ltd. Chief Executive Officer Joshua Oigara said in an interview in the capital, Nairobi, last week. Even the bank’s best-case scenario is that a review process of the rate caps won’t be done by the end of 2018, he said.

Kenya’s government imposed a ceiling on commercial lending rates in 2016 to stoke private-sector lending that’s growing at the weakest pace in at least a decade. That’s undermined earnings and growth in East Africa’s biggest economy, which is expected to slow to 5 percent this year from 5.8 percent in 2016. The slowdown has been exacerbated by slowing farm output caused by a drought, and disputes over the country’s presidential elections, which have curbed investment.

KCB expects growth in fourth-quarter earnings will be “slightly slower,” as a result of the elections and the economic slowdown, Oigara said. The company is investing in digital-payment systems and other financial technology, including blockchain, to support future earnings growth.

“In terms of return on equity, it will be in the 21 percent to 22 percent” range, he said. “We believe our growth is going to be about 10 percent. So it will be a robust performance for 2017.”

Lending to the private sector may slow further in 2018 as new accounting rules for banks –International Financial Reporting Standard 9 — come into effect, potentially requiring banks to as much as double loan-loss provisions, KPMG said in a report in September. IFRS 9 will increase risk costs for banks, Oigara said.

“We are adequately capitalized ourselves to deal with IFRS 9 from Jan. 1,” Oigara said. “Our own model shows our cost of risk will increase on average between 25 percent and 30 percent.” he said. While the bank’s capital adequacy ratio will decline by 100 basis points on the implementation of the new accounting standard, the bank will not raise additional capital.

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