Bank stocks up Sh21bn in rate cap review push

The wealth of investors owning banking shares increased by Sh21.6 billion after the lenders’ stocks surged on news that President Uhuru Kenyatta has demanded that lawmakers remove the cap on commercial lending rates.

Seven of the 10 banks listed at the Nairobi Securities Exchange (NSE) gained on what stock dealers linked to increased demand for the lenders' shares on the expectation of increased profitability and stock gains.

The rally started on Thursday when news leaked to the market that Mr Kenyatta had sent a memo calling for the repeal of the law that introduced the rate cap in September 2016.

Investors in Equity gained Sh7.3 billion in the two days after the share rose 5.4 percent, KCB rose Sh5.93 billion after the stock increased 4.4 percent while owners of Co-operative Bank saw their wealth rise Sh2.3 billion.

Standard Chartered, I&M Bank and mortgage lender HF shares failed to register price gains, shedding Sh134 million collectively although this had little impact on their market valuation.

"The rally in banks stocks was expected in light of the President’s action. There is a lot of interest in the matter," said Martin Kirimi, an analyst at Standard Investment Bank (SIB).

Equity Bank CEO James Mwangi, head of Co-operative Bank Gideon Muriuki and the family of the late Central Bank of Kenya governor Philip Ndegwa are among the individual investors who look set to gain from a rally in banking stocks.

Mr Mwangi’s five percent stake in Equity rose Sh368 million in the two days to stand at Sh7 billion while Mr Muriuki’s 1.7 percent stake in Co-operative Bank rose Sh41 million to Sh1.3 billion.

The 8.4 percent share rally in NCBA, formerly NIC Bank, saw the worth of the Ndegwa family stake in the lender increase by Sh440 million to Sh5.6 billion. Barclays Bank gained Sh1.6 billion, Stanbic (Sh1.3 billion) and DTB (Sh1.2 billion).

Experts have forecast that the rally in banking stocks will continue in coming days as the market waits for MPs to vote on the President’s order. The lawmakers are expected to issue their verdict after two weeks when they return from recess.

Lawmakers have the option of removing the cap from the bill or overruling the President if two thirds of the 349 members or 233 MPs vote to override his position,

In 2016, the government limited the rates banks could charge customers to four percentage points above the central bank’s benchmark - currently nine percent - saying they were concerned about high cost of loans.

This restricted loan costs to a maximum of 13 percent, triggering a credit crunch as commercial banks cut off millions of low-income customers and small businesses deemed as too risky.

The cap also made bank stocks unattractive to investors seeking capital gains at the Nairobi bourse.

Before introduction of rate caps, interest rates had risen up to 25 percent in what guaranteed the lenders double digit profits and dividend growth and cemented the lenders' stocks as crown jewels at the NSE.

Banking sector financial performance data for the past four years shows that the lenders have managed to recover their footing after the initial hit from the rate cap, largely by turning to risk-free government lending and aggressively cutting costs.

In the year ending December 2018, banks made a record high Sh111.3 billion net profit, eclipsing the Sh102.2 billion they made in 2016, which was the last year of trading before the rate cap. The profits dropped to Sh100.2 billion in 2017.

The lenders grew their holdings of government securities by 51 percent or Sh398 billion to Sh1.17 trillion between the end of 2016 and September 2018.

In the same period, they only grew their loan book by 8.4 percent or Sh191 billion to Sh2.47 trillion, bank financial reports show.

Big lenders such as KCB and Equity and Co-op, which dominate retail banking, have found it relatively easier to recover from the effects of the rate cap compared to their smaller rivals.

Kenya Bankers Association (KBA), which welcomed the move to repeal the rate cap, has indicated the extent to which lenders reduced credit to the private sector. "Lending has reduced by more than 1.2 million accounts," KBA chairman Joshua Oigara said in a statement. "Additionally, the size of loans has increased by 47 percent; therefore, those who had a loan are borrowing more while those whom the law was intended for are forced to expensive and informal lending channels or shylocks."

The credit crunch triggered an appetite for digital loans, leading tens of unregulated microlenders to invade Kenya’s credit market in response to a rise in demand for quick loans.

Their proliferation has saddled borrowers with high interest rates, which rise up to 520 percent when annualised, leading to mounting defaults and listing of thousands of defaulters with credit reference bureaus.