Kenya's Banking Sector in 2023
CBK releases the Bank Supervision Annual Report 2023
👋 Welcome to The Mwango Weekly by Mwango Capital, a newsletter that brings you a summary of key capital markets and business news items from East Africa.This week, we cover highlights from CBK's Bank Supervision Annual Report 2023, the under-subscription of Kenya’s Treasury bonds, and leadership changes at Nation Media Group.This week's newsletter is brought to you by The Kenya Mortgage Refinance Company.
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Kenya's Banking Sector in 2023
Last week, the Central Bank of Kenya (CBK) released the Bank Supervision Annual Report 2023 covering highlights of the banking industry in 2023. Here are some of the key highlights from the report:
Market Structure: The banking sector closed 2023 with a total of 39 banks, with 20 of them being locally owned, 17 foreign-owned, and 2 owned in majority by the Government of Kenya (GoK). Their contribution to net assets stood at 69.2%, 30.3%, and 0.4%, respectively. The number of Money Remittance Providers and licensed Digital Credit Providers (DCPs) grew by 4 and 22, respectively. As of 7th March 2024, there were 51 licensed DCPs.
Market Share: The 9 banks within the large peer group closed the year with a combined weighted market share of 76.6% (2022: 75.1%). Net assets totaled KES 5.TB, up by nearly KES 1T as compared to 2022. Their combined deposit base was KES 4.6T, up 22.2%%, capital and reserves at KES 732B, up 7%, and pre-tax profits at KES 186B, down 11%.
Deposit Accounts: KCB Kenya closed the year with the largest number of accounts with less than KES 500K at 37.6M, up 240%, the highest growth in the year across the banks. In terms of banking sector accounts with more than KES 500K, NCBA Bank Kenya recorded the largest number at 416.8K, up 184% - the only bank that recorded year-on-year growth under this category. In sum, KCB closed with the highest number of overall deposit accounts at 37.7M, up 232%.
Asset Quality: Banking sector loan loss provisions totaled KES 286.9B, with the gross pile of Non-Performing Loans (NPLs) closing the year at KES 651.8B. KCB Group accounted for the largest share of NPLs at KES 166.3B (25.5%). The trade sector had the largest amount of NPLs at KES 137B (21%).
Across Microfinance: At the end of 2023, there were 14 microfinance banks, unchanged from 2022. The 5 large microfinance banks controlled 83.8% of the market, up 1.9% while the 6 medium ones and the 3 small ones controlled 15.0% and 1.2%, having lost 1.4% and 0.5% of market share relative to 2022, respectively. In sum, these players had KES 64.2B in total assets, KES 43.9B in total deposits, and KES 6.8B in total capital.
Profitability: KCB Kenya closed the year with the largest pre-tax profits at KES 33.3B, followed closely by Co-operative Bank of Kenya at KES 29.6B, and Equity Bank Kenya at KES 25.2B. The total industry returned KES 186B in pre-tax profits, a decline of KES 23B from 2022.
Regional Performance: Across the region, Kenyan Bank's subsidiaries' pre-tax profits totaled KES 66.13B, up 103.4%. One Ugandan subsidiary reported a loss of KES 25.4M. The Democratic Republic of Congo (DRC) accounted for the largest share of pre-tax profits at 45.5%, followed by Rwanda at 20.9%, and Uganda at 13.5%. Tanzania, South Sudan, Mauritius, and Burundi contributed a total of 20.16%.
Mobile Money Subs: The aggregate value of mobile money transactions reached KES 788.35B, roughly 5.2% of the KES 15.1T in Gross Domestic Product (GDP) recorded in the year. The 11.3% year-on-year growth was driven by the growing demand for cashless transactions coupled with the addition of 8,555 new active mobile money agents in the year.
Penalized: In 2023, the CBK penalized 9 commercial banks that violated the single obligor limit of 25% of core capital, meaning that the lenders had on their books loans to individual clients that exceeded 25% of core capital. Further, 3 banks were in violation of the single insider borrower limit of 20% of core capital, while 2 banks were in violation of the total insider borrower limit of 100% of core capital. 3 commercial banks also violated the clause of not more than 20% of core capital in land and buildings, while 5 banks violated the clause that restricts aggregate credit facilities to all large clients to not more than 5% of core capital. In terms of capital adequacy, 2 banks failed to maintain the minimum required core capital of KES 1B, while 4 banks did not meet the threshold for the total capital to Total Risk-Weighted Assets (TRWA) ratio, core capital to TRWA, and core capital to total deposit ratio, which were 14.5%, 10.5%, and 8.0%, respectively.
Capital Base: The CBK intends to gradually raise the core capital requirements for banks to KES 10B, and going by data at the end of 2023, only 14 had KES 10B or more in core capital, with 25 not meeting the KES 10B threshold. Should this get implemented, it is likely to result in mergers, acquisitions, and consolidation in the industry.
Find the entire report here and a thread on the key highlights here.
No Takers for Kenya’s Bonds
Lacklustre Uptake: Kenya's government is struggling with significant under subscriptions in its bond market in the new 2024/2025 fiscal year, raising only KES 10.3B out of KES 50B sought in the fiscal year. A bid to raise KES 30B through 10 and 20-year reopened treasury bonds saw KES 14.7B in bids submitted (49% of target), with the CBK only accepting KES 9.8B (33% of target). On the 4th of July’s auction, the KES 20B tap sale recorded KES 487.5M in bids, a paltry 2.4% of the target. These levels of under-subscription reflect investor concerns over Kenya's economic outlook and fiscal health, in particular, the ability to make up for the revenue shortfall through borrowing.
Undersubscription Amidst Austerity: The undersubscription trend complicates the government's fiscal strategy in the current fiscal year, which is set to heavily rely on borrowing to finance budget deficits occasioned by revenue shortfall following the rejection of the Finance Bill, 2024. Market participants are closely watching for potential adjustments in borrowing strategies or fiscal policies to boost investor confidence.
In July 2023, the government aimed to raise KES 40B through new and reopened treasury bonds. The bids received were KES 29.1B and KES 22.7B for the new FXD1/2023/05 and the reopened FXD1/2016/10 bonds, respectively. Of these, KES 22.8B and KES 15.7B were accepted. Further, a tap sale in the same month targeted KES 20B but received bids of KES 12.2B and KES 32.2B for the same bonds, and the government accepted KES 12.2B and KES 31.2B of these bids, respectively.
“The month's T-bond auction was disappointingly low, but largely on account of thin liquidity in the banking system. Delayed GoK spending as FY25 fiscal targets are readjusted has compounded the low liquidity levels in banks, which has seen CBK intervening to inject liquidity via reverse repos. Whereas the auctions have disappointed, the secondary market activity has been parched at KES 44bn levels, suggesting that the liquidity-starved banks have been ramping their liquidity levels via bond sales, mostly IFBs.”
IC Asset Managers Economist, Churchill Ogutu
Kenya’s Revenues and Net Exchequer Issues in FY 23/24: Kenya's tax revenue collections for June 2024 rose by 4.8% year-on-year to KES 232.2 billion, contributing to a 10.1% annual increase to KES 2.16 trillion for the fiscal year from July 2023 to June 2024. This figure represents 96% of the KES 2.25 trillion target set in Supplementary Budget II and 86.6% of the original KES 2.495 trillion target. Looking ahead, Kenya has set a very ambitious target for FY 2024/2025 at KES 2.573 trillion, following the shelving of the Finance Bill 2024.
Markets Wrap
NSE: In Week 29 of 2024, EA Portland led the market, rising 20.2% to KES 5.36, while Eaagads was the worst performer, dropping 7.7% to KES 12.00. The NSE 20 rose by 0.3% to 1,701.7 points while both the NSE 25 and NASI indices dropped by 0.8% and 1.3%, closing at 2,886.9 and 108.6 points, respectively. Equity turnover rose by 11.4% to KES 1.3B, while bond turnover dropped to KES 45.18B from KES 46.73B the previous week.
Treasury Bills and Bonds: The weighted average interest rate of accepted bids for the 91-day, 182-day, and 364-day were 16.03%, 16.85%, and 16.89% respectively. The total amount on offer was KES 24B with the CBK accepting KES 18.7B of the KES 20.9B bids received, to bring the aggregate performance rate to 87.43%. Notably, the 91-day bill is back to above 16.0% for the first time since April 2024.
Eurobonds: In the week, yields were up week-on-week across the 5 outstanding papers with KENINT 2028 rising the most, up 46.00 bps to 10.259%, followed by KENINT 2027 at 33.80 bps to 8.927%. KENINT 2032 rose the least, up 23.10 bps to 10.463%. The average week-on-week change stood at 23.38bps.
Market Gleanings
👨💼| Nominees to Cabinet | President William Ruto moved to reconstitute his cabinet last week by nominating 11 new members amid ongoing national protests. He plans to nominate additional members next week after consulting with the opposition leader, whom he has invited to join the government. Notably, six of the 11 nominees were part of the previous cabinet.
“While the events of the past month have caused tremendous anxiety, concern and uncertainty, the crisis has presented us with a great opportunity, as a nation, to craft a broad-based, and inclusive citizen coalition for national transformation and progress, made up of Kenyans from all walks of life.”
💼| Leadership Changes at NMG | Stephen Gitagama, CEO of Nation Media Group, will step down on 1st August 2024 after a seven-year tenure. Richard Tobiko, the current CFO, will serve as interim CEO. Gitagama's departure follows recent layoffs in May and June 2024 affecting over 1.6K employees, marking the fifth round since he took over from Joe Muganda.
❌| Centum Real Estate Rating Withdrawn | On 15th July, GCR Ratings, now a part of Moody’s, withdrew Centum Real Estate Limited’s national scale long-term and short-term Issuer ratings of BBB+(KE) and A2(KE) without review, citing "business reasons." GCR clarified that this withdrawal does not indicate any issues with Centum's debt servicing or financial position. Centum Real Estate is a 100% owned subsidiary of Centum Investments.
☀️| KenGen’s Solar Energy Project | Kenya Electricity Generating Company (KenGen) is set to add 42.5MW of solar energy in the Seven Forks area, enhancing Kenya's green energy efforts. The 28-month project, in partnership with the French Development Agency (AFD), aims to install a solar power plant to complement the region's hydroelectricity.
🔴| Deal Not Yet Approved | The COMESA Competition Commission (CCC) has yet to approve the proposed acquisition of National Bank of Kenya (NBK) by Nigeria's Access Bank that was announced in March 2024, usually the last step to complete the transaction. Twelve days ago, the CCC launched an inquiry to assess whether the merger could reduce competition or harm public interest within the Common Market.
🚎| IFC to Inject $350M into Safaricom Ethiopia | The International Finance Corporation (IFC) plans to lend Safaricom Ethiopia an additional $350 million to bolster its telecommunications and mobile money services expansion. This follows last year's $157.4 million debt and $100 million equity investment for a 7.25% stake, raising IFC and partners' total financing to $607.4M.
“IFC’s further proposed loan of up to US$350 million will support STEP with the ongoing expansion of its telecommunication network and mobile money services and enhance the competitiveness of the local telecommunications market. The proposed loan will consist of an up to US$150-200 million own account investment and mobilization of up to US$150-200 million from other development finance institutions (DFIs) and lenders”
💰| UAE and Ethiopia Currency Swap Deal | The Central Bank of the UAE (CBUAE) and the National Bank of Ethiopia (NBE) have signed a currency swap agreement and two Memoranda of Understanding (MoUs) to promote the use of local currencies in cross-border transactions. The agreement allows for the exchange of up to AED 3B and ETB 46B, enhancing financial and commercial cooperation.
📅 | Week ahead | A packed week ahead in Kenyan markets:
22nd July 2024: Deadline to submit the Supplementary Budget I comments
23rd July 2024: National Assembly resumes with the fate of Finance Bill 2024 top of the agenda
24th July 2024: Budget Committee tables Report for Supplementary Budget I on or before this date
25th July 2024: The Safaricom AGM
26th July 2024: The BAT Half Year 24 Results
Chart of the Week
