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Banking & Microfinance

Kenyan Banking Sector FY22 Results Summary – Re-pricing to Improve Margins; NPLs to Persist



The banking sector displayed positively throughout the year. Robus’s double-digit performance was reported by all the nine listed banks under our coverage as the lenders weaved through the tougher economic environment evidenced by rising inflation, higher interest expenses, declining bond valuations, and currency challenges.

The strong performance was also reflected in the dividends as all the nine lenders save for Kenya Commercial Bank (KCB) raised their absolute dividends without significantly raising their payout ratios.

KCB’s pay-out dropped significantly (15.8% vs 44.7% in FY19) due to its 85% acquisition of Trust Merchant Bank (TMB) – DRC which impacted its
capital ratios as well as a rise in non-performing loans (NPLs).

We believe the transaction cost came in much higher at KES 25bn from our initially estimated KES 20bn given it was completed towards the tail end of the year, with TMB growing its book value within the period coupled with the Kenya shilling weakening.

Sector loan book growth averaged 17.7% within the year with most lender cutting their forecasts for FY23 which we think could settle around 10%.

We envision that the lenders will have a mad dash for borrowers (digital as well as corporates in the steel and energy sectors) within the region
in a bid to lock in income at high margins amid a potential decline in private-sector credit.

In addition, we expect to see more focus and competition on the digital lending side as various banks ramp up their digital lending as already
witnessed by Co-op Bank, Stanbic, KCB, Equity Bank, and Absa Bank.

During the year, foreign exchange trading income was a major winner for the banks as most lenders posted near doubling in the income line which
considerably supported their bottom line.

This considerably boosted bank’s non-funded line contribution to levels not witnessed in recent memory.

It is key to note that the Competition Authority of Kenya (CAK) has launched a probe into some banks for alleged fixing of foreign
exchange rates with likely fines or convictions if found culpable.

Notably, some weakness began to be witnessed in 4Q22 with most lenders posting upticks in provisions and NPLs alongside declines in fee income.

Further cementing this argument, only Equity Bank, I&M and StanChart recorded quarter-on-quarter (q/q) gains in their 4Q22 profit before tax
(PBT), cumulatively accounting for KES 3.3bn (35.4%) out of the KES 9.3bn rise in overall banking sector 4Q22 quarterly income.

However, as of January 2023, overall banking sector PBT stood at KES 21.4bn (+12.6%y/y) – highest January PBT since 2015 (KES 37.3bn).

Net interest margin (NIMs) growth should be witnessed within the year
as some lenders begin implementation of risk-based pricing lending with
others repricing
loan rates following the hike of the Central Bank Rate (CBR).

_*movement between 3Q22 & FY22_

Being cognizant of the heightened credit risk in light of the elevated sticky inflation, we analyzed non-performing loans; highlighting sectors
that have a high contribution to NPLs, NPL ratios per sector as well as historical Gross NPLs.

The regulator noted that the banking sector NPL ratio worsened to 14.0% in February 2023 from 13.3% in December 2022, though noted that banks
have made adequate provisions.

We reiterate that part of the solution to the NPLs may be in the resolution of government pending bills, contained inflation, currency
stability and overall recapitalization of firms that struggled during the COVID-19 crisis.

At the same time, private sector credit growth dropped to 11.7% from 12.7% in December denoting the impact of the interest rate hikes by the Central Bank, with potential borrowers more cautious about their borrowing amid higher interest rates.

Liquidity remained sufficient though it progressively declined from 56.7% in January 2022 to 50.7% in January 2023 – lowest since July 2020

Key happenings within the year included a 50% overall reduction in fees charged on the Fuliza product (partnership between Safaricom, KCB and NCBA), a credit repair framework in which 50% of non-performing digital loans which had tenures of 30 days or less would be forgiven (expires on 31st May 2023), IFC became the second largest shareholder in Equity Group, announcement of reinstatement of bank <-> mobile charges at discounted rates of up to 61% on bank to M-Pesa charges (I&M has waived these charges).

We have upgraded our recommendation on Equity Bank and I&M Bank from a HOLD to a BUY in light of declining MTM losses, robust loan book and non-funded income outlook, risk-based pricing implementation and a price decline already witnessed, and on attractive trading multiples and
improving metrics respectively.

Key to note, lenders will by June shift their loans, deposits, and borrowing contracts which are pegged to the LIBOR (London Interbank
Offered Rate) to SOFR (Secured Overnight Financing Rate) which is considered more accurate and secure. In addition, banks will be required to comply with much stricter IFRS 9 capital ratios following the expiry of the 5-year CBK allowance in which they could add back loan loss provisions to capital.

By the Standard Investment Bank Research team

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Banking & Microfinance

Equity Bank Plots New Ksh 7.6 Bn Staff Share Reward Scheme



Equity Bank Group Chief Executive Officer Dr. James Mwangi

Equity Group has announced the revival of its employee share ownership plan (Esop) in an effort to retain and attract talented staff. The bank plans to distribute 198.6 million shares, valued at Sh7.6 billion, to employees over the next 10 years. This comes after a previous attempt four years ago to implement a similar plan, which was abandoned just before the allotment of 205.7 million shares in 2019.

Equity Group’s board has proposed the creation of additional shares to support the Esop and will seek shareholder approval during the upcoming annual general meeting on June 28.

The newly created shares will amount to five percent of the company’s share capital, raising the maximum share capital from Sh1.886 billion to Sh1.986 billion. The directors will have the flexibility to issue the additional shares in tranches and based on terms and conditions they deem appropriate.

Notably, the Group’s CEO, James Mwangi, is among the employees expected to benefit from the share allotment. The previous Esop plan in 2019, which was withdrawn during the AGM, would have allocated 205.7 million shares worth Sh8.4 billion to bank staff.

This new Esop will be the second of its kind for Equity Group, as the bank initially established a stock-based compensation scheme before its listing on the Nairobi Securities Exchange in 2006. Esops are employee benefit plans that provide ownership interest in the company through shares. They are designed to enhance staff productivity, reward employees, and attract and retain talent. The approval of the Capital Markets Authority (CMA) is required for the implementation of Esops. According to the CMA, as of March 2021, it had approved 14 Esops.

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Banking & Microfinance

StanChart wins Court Case Against Taxman over Ksh 350 million Tax Row



File image of a Kenya Revenue Authority (KRA) iTAX office

The High Court this June delivered a significant blow to the Kenya Revenue Authority (KRA) by ruling that it cannot impose levies on the fees collected by banks from card transactions.

Justice David Manjanja concurred with Standard Chartered Bank’s argument that the KRA cannot impose both the 16% value-added tax (VAT) and excise duty on the fees paid by merchants for the use of point-of-sale (POS) machines.

This ruling represents a second defeat for the KRA, as the Tax Appeals Tribunal (TAT) had previously determined that the role of banks is solely to verify cardholder information during money transfers.

The core issue at stake was whether interchange fees are exempt from VAT and whether the commissioner’s application of the shortfall penalty was justified. Standard Chartered contended that interchange fees are ancillary to money transfers and, therefore, should be exempt from VAT. According to the bank, the fees charged to merchants are strictly for the purchase of goods or services and cannot be considered as money transfers.

On the other hand, the KRA argued that card users of VISA International Services Association, MasterCard, Inc., and American Express Ltd pay a royalty to the global service network system for facilitating the transaction, making it subject to VAT at the standard rate.

Justice Majanja determined that while the KRA relied on a Court of Appeal decision regarding ABSA’s payments to Visa companies for trademarks and logos, the appellate court did not specifically address royalty payments. As a result, Justice Majanja rejected the commissioner’s argument that interchange fees constitute royalty payments and are subject to VAT, noting that the Court of Appeal’s decision indicates otherwise.

In its defense before the TAT, Standard Chartered also argued that excise duty should be paid by the receiving bank that owns the point-of-sale (POS) machine, with the remaining fees distributed among issuing banks and payment service providers like VISA. The tribunal concluded that imposing excise duty on fees received by Standard Chartered would amount to double taxation.

The KRA conducted a review of the financial statements of lenders from January 2014 to September 2018. As a result, it claimed that Standard Chartered owed additional excise duty on earned fees and commissions, totaling Sh505.7 million, including interest and penalties.

As of March 2021, there were 48,355 POS machines in the country, facilitating a total of 3,511,453 transactions.

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Banking & Microfinance

Kenya’s Equity Group Q1 2023 Pretax Profit up 10%



Equity Group Holdings

Equity Group Holdings, a leading financial institution in Kenya with operations in several other African countries, announced a 10% increase in pretax profit for the first quarter of 2023. The pre-tax profit reached 16.9 billion Kenyan shillings ($124 million), driven by the growth of its loan book.

Equity reported a significant rise in net loans, which increased by over 20% to 756.3 billion shillings compared to 623.6 billion shillings in the same period the previous year. This expansion in the loan portfolio contributed to the bank’s positive financial performance.

Additionally, Equity Group obtained regulatory approval to establish a general insurance business in Kenya, expanding its offerings beyond life assurance.

The bank’s total assets also experienced substantial growth, surging by 21% to 1.54 trillion shillings from 1.3 trillion shillings in the first quarter of 2022, indicating the bank’s strong overall performance and increasing market presence.

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