2012-06-30 03:53:25 - Fast Market Research recommends "Kenya Commercial Banking Report Q3 2012" from Business Monitor International, now available

BMI View: 2012 will be a year of two halves for Kenyan banks. The first six months will prove challenging due to high inflation and interest rates and tight domestic liquidity. However, conditions should improve as these pressures dissipate over the course of the year. All told, we believe that total banking sector assets will grow to KES1,817bn (US$20bn, 44% of GDP) by the end of 2012, 15% higher than our estimated figure for the end of 2011. Policy risk poses the greatest threat to the sector in our view. In line with the view that we put forward in our last quarterly update on the Kenyan banking sector, there are signs that banks are starting to feel the strain

of an adverse macroeconomic climate ( online service, October 27, 'Clouds Gathering For Banking Sector Although up-to-date data on asset growth were unavailable at the time of writing, anecdotal evidence and the trajectory of interest rates suggest that credit extension is slowing. In further bad news for the sector, banks are also facing pressure from the government to cap lending rates. Growing political scrutiny raises the risk of greater regulation which could harm the long-term prospects not only of the Kenyan banking sector but of the economy as a whole. The news is not all bad however. It seems all but certain that the Central Bank of Kenya's (CBK) aggressive hiking cycle enacted during the final months of 2011 has come to an end. With inflation likely having topped out, we believe that the CBK will begin easing policy during the second quarter of 2012 and this should ease some of the pressure on Kenyan banks. Liquidity in the economy is also likely to receive a boost by increases in fiscal expenditure as elections (currently scheduled for March 2013) approach. With these things in mind, we believe that the climate will improve for the banking sector as the year progresses. Challenging Times... The latest available data from the CBK show that loan growth continued to accelerate rapidly in September with total private sector credit coming in at KES1,148bn (US$11.9bn), some 36% higher than a year earlier. While this rate of growth is certainly impressive, the data are too early to incorporate the effects of the aggressive monetary tightening regime adopted by the CBK during the final months of 2011. The monetary authorities hiked the benchmark central bank rate (CBR) by 1,175 basis points (bps) to 18.00% between September 14 and December 2 and anecdotal evidence suggests that this is already having a meaningful impact on the banking sector. For one thing, commercial banks have been quick to respond to the hikes by raising the rates they charge customers to borrow and this will price many would-be borrowers out of the market. The average overdraft rate (which is a good proxy for overall lending rates) shot up to 20.2% by the end December after having rattled along at 13-14% for the best part of five years. The fall in demand for credit was corroborated by the CBK's monetary policy committee in the statements accompanying the last two interest rate decisions (which were both holds at 18.00%) which both alluded to a falling rate of credit growth without citing specific figures. ...Will Slowly Get Better Looking ahead, we believe that high benchmark interest rates and still high (albeit falling) inflation will continue to weigh on demand for credit from the private sector. Although we do not think that there will be further hikes and that the CBK will begin lowering the CBR during the second quarter of 2012, we believe that the reins will be kept relatively tight on domestic liquidity via the repo market. This will limit the supply of credit. Furthermore, given attractive nominal yields and the prospect of falling inflation, banks are likely to favour allocating spare cash to government treasuries rather than the private sector. So while total banking sector assets will still grow during the first six months of the year, we believe that this will largely be driven by increases in banks' holdings of government debt rather than by private sector credit extension. We believe that the prospects for private sector credit extension will start to improve in the second half of the year. Indeed, yields on local debt are likely to fall rather quickly meaning that the opportunity cost of lending to the private sector will decrease. We also believe that the CBK will begin to loosen policy in earnest as inflation heads towards single digits (our year-end inflation forecast is 8.1% year-on-year, Kenya Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 31 down from 18.3% in January) and this, combined with increased government spending ahead of elections, should supply the system with enough liquidity to kick-start lending once again. Taking all of the above into account, we believe that total banking sector assets will grow to KES1,817bn (US$20bn, 44% of GDP) by the end of 2012, 15% higher than our estimated figure for the end of 2011. Policy Risks Although the outlook will improve for the banking sector as 2012 proceeds, there are several salient risks. Parliament is due to debate a Finance bill during the first half of the year which would seek to cap lending rates at 400bps above the CBR and deposit rates at 300bps below the CBR. Although there is likely to be a fair amount of support among MPs for such a populist measure in an election year, we tend to believe that Kenya's reputation for adherence to free market principles will prevail. Indeed, even if parliament passes the bill, it will still have to be signed by President Mwai Kibaki who will not feel the same populist pressure to do so, given that he is not eligible for re-election.


Full Report Details at
- www.fastmr.com/prod/404254_kenya_commercial_banking_report_q3_20 ..


About Business Monitor International

Business Monitor International (BMI) offers a comprehensive range of products and services designed to help senior executives, analysts and researchers assess and better manage operating risks, and exploit business opportunities, across 175 markets. BMI offers three main areas of expertise: Country Risk BMI's country risk and macroeconomic forecast portfolio includes weekly financial market reports, monthly regional Monitors, and in-depth quarterly Business Forecast Reports. Industry Analysis BMI covers a total of 17 industry verticals through a portfolio of services, including in-depth quarterly Country Forecast Reports. View more research from Business Monitor International at www.fastmr.com/catalog/publishers.aspx?pubid=1010

About Fast Market Research

Fast Market Research is an online aggregator and distributor of market research and business information. We represent the world's top research publishers and analysts and provide quick and easy access to the best competitive intelligence available.

For more information about these or related research reports, please visit our website at www.fastmr.com or call us at 1.800.844.8156.