Kenyans in a bank.[photo/kenyans.co.ke]
Commercial banks in Kenya need to rethink their revenue generation strategies if they still want to remain profitable ventures, analysis by Cytonn Investment indicates.
According to the banking sector quarter three financial report analysis, capping of interest rates coupled with deteriorating asset quality has drastically reduced banks’ profitability.
Releasing the “What Next for the Kenyan Banking Sector”, report Cytonn investment manager Maurice Oduor said banks need to adjust their business models which focus on interest income in order to make a profit.
“Banks need to disburse loans prudently in order to address the concerns around assets quality especially after the introduction of IFRS 9, which comes into effect in January next year, coupled with efficiency, through cost rationalization measures, in a bid to protect their profit margins,” he said.
In the analysis, KCB Group was the most attractive bank in Kenya for the second consecutive year mainly due to its strong franchise and intrinsic values score. The franchise score measures the broad and comprehensive business strength of the company across 13 different metrics, while the intrinsic score measures the investment return potential.
Housing Finance Group ranked last in the franchise ranking, despite a better ranking in the intrinsic value score. Caleb Mugendi, an investment analyst, said banks need a disciplined approach to forestall the rising non-performing loans (NPLs) and the capping of interest rates.
“With deteriorating asset quality, evidenced by the rising non-performing loans, coupled with the interest rate caps, we expect prudence and efficiency to be the two key factors that will determine the performance of the banking sector,” said Mugendi.