Banks await CBK nod on risk-based pricing model
Commercial banks are negotiating a deal with the Central Bank of Kenya (CBK) that will see them vary the interest rates pricing template in a move that could see them return to mega-profits.
Renaissance Capital says in a new report that although the rate caps were repealed over two years ago lenders are still in deliberations with CBK on the approval of the risk-based pricing template.
Risk-based pricing occurs when lenders offer different consumers different interest rates or other loan terms, based on the estimated risk that the consumers will fail to pay back their loans.
“According to the banks, conversations are at the final stages, stalled by ongoing discussions around the acceptable charges on fees and commissions,” said Renaissance Capital in the latest banking sector report.
Renaissance says the regulator is trying to compel banks to charge uniform fees and commissions across the industry, something that could impact profitability.
Pending authorisation
“Following the removal of rate caps in November 2019, we gather that the CBK has approved the risk-based pricing templates of two small banks, but is yet to authorize those of other banks,” the report says.
The report says deliberations have reached the final stages, but certain sections still require dialogue, particularly on the fees and commissions.
“Our findings suggest that the regulator prefers for there to be a uniform charge with regard to fees and commissions across the banking sector. The banks however believe that this needs to be reconsidered given the effects it could have on profitability,” Renaissance said, adding that approval of the risk-based pricing template will be a positive catalyst for lending activity.
Commercial banks were reported to have complained to the International Monetary Fund (IMF) that CBK has been unwilling to approve their proposals to change interest rates.
The banking sector is battling high non-performing loans brought on by the Covid-19 pandemic and are desperate for a raise on interest margins to save their bottom lines ahead of elections.
Lift in margins
“A positive resolution here could lift margins. We remain positive on the net interest revenue growth trajectory for the Kenyan banks, underpinned by sustained economic recovery, growth in transactional activities, and a more aggressive push by the banks on the digital front,” the investment banknotes.
Without that rate hike, banks are likely to continue facing the risk of elevated non-performing loans compared to their peers in the rest of Africa.
“Despite the asset quality improvement at the Kenyan banks, we note that structurally, the NPL ratios are still relatively elevated when compared to other sizeable African peers,” says the analysts at Renaissance.
The latest available NPL ratios are 5.3 per cent, 5.1 per cent and 3.6 per cent in Nigeria, Rwanda and Egypt respectively compared to 13.6 per cent in Kenya.
Before the Covid-19 pandemic, Kenyan banks were found to have the highest returns on equity across the continent.
Going into 2022, Renaissance expects interest revenue growth to continue driven by sustained economic recovery, growth in lending and transactional activities, and a more aggressive push by the banks to implement and drive their respective digital strategies.
Kenyan banks have been pushing various digital strategies to fend off competition from fintech. These include KCB’s Vooma, Equity’s Pay With Equity and Coop’s MCoop Cash.
“In our view, the benefits of the digital strategies of the banks especially around payments will first come from the cheap deposits that could potentially be mobilised,” the report notes.
This will be margin-supportive given the advantages it will have on funding costs. If the banks can achieve scale and gain traction over time, we could also see more meaningful contributions to revenue from their digital initiatives.
The report also notes asset quality continues to be a critical risk especially given the current political landscape and the economic shocks that could still occur.
