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Banks seen lowering deposit rates, retreat to Treasuries to protect profits

The Central Bank of Kenya. FILE PHOTO | NMG Commercial banks are likely to lower their cost of funds and increasingly retreat to government securities in coming months in a bid to cushion their profitability, analysts at KCB Capital #ticker:KCB say.

In practice it means that lenders will push down deposit and savings rates, which were last recorded in April by the Central Bank of Kenya at an average of 7.01 and 4.21 percent respectively, to protect net interest margins.

The institutions will be trying to cope with the restructuring of hundreds of billions of shillings in loans that has caused repayments to be deferred thereby depressing their interest income in the face of Covid-19 pandemic.

Banks are also facing subdued non-funded income with the removal of fees for cash transfers between customer accounts and mobile wallets.

“We expect banks to respond by lowering the cost of funding to cushion interest income (and consequently net interest margins), while enforcing cost rationalisation measures to contain operating expenses and restrict the expected spike in the cost-to-income ratio (CIR),” KCB Capital wrote in a report to clients.

Growth in loans is also likely to remain low as a way to curb the rise in non-performing loans (NPLs) that are projected to lead to an increase in provisioning, the analysts say.

Some banks are also cutting dividend payments to preserve cash. “Banks [will] respond by increased allocation to government securities and depressed loan growth on the back of a rise in NPLs and preserving capital, through reduced dividend payments in the 2020 financial year,” said the analysts.

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