Industry Forecast - Banking Sector Poised For Strong, Sustained Growth - 29 JUNE 2015


BMI View: An accelerating domestic economy, the proliferation of mobile financial services and regional expansion opportunities will see Kenya's large and developed banking sector continue to grow rapidly over the coming years.

Despite a high starting point we believe that asset and loan growth in Kenya's banking sector will remain brisk over the coming years. While already relatively developed by African standards - only South Africa, Namibia, Mozambique and Mauritius (an offshore banking hub) hold more assets as a share of GDP - we believe there is still ample head room for further expansion thanks to a rapidly growing economy, the spread of mobile financial services (MFS) and ripe regional expansion opportunities. We expect total banking assets as a percentage GDP to reach some 70% by 2019 from 62% at the end of 2014.

Still A Demand Story

The Kenyan banking sector has been accelerating steadily since early 2014 as the domestic economy has started to pick up. The latest figures from the Central Bank of Kenya (CBK) show that total commercial banking assets grew by 19.3% in 2014, compared to 16.1% in 2013, while client loans increased by 22.9%, up from 17.9% the previous year. With the economy poised to grow strongly over the coming years - we forecast real GDP growth to average 6.3% annually between 2015 and 2017 - we believe this rapidly growing demand for financial services will be sustained. As such, we expect asset growth to average some 17.3% over this period, while client loans will expand at an average annual rate of 17.7%.

Steadily Accelerating
Kenya - Assets & Loans, % YoY

Loan growth will remain the primary engine of growth and profitability in the banking sector over the coming years, driven by demand from a variety of economic sectors. The distribution of credit reflects the diversified nature of the Kenyan economy. In 2014, credit extended to the private sector was broken down as follows: households (26.2%), real estate (18.8%), manufacturing (16.3%), trade (15.7%), transport & communication (11.95), business services (9.9%), finance & insurance (6.0%), consumer durables (5.25) add agriculture (4.8%).

This general diversification of banks' loan portfolios reduces the potential fallout stemming from over-exposure to an underperforming sector, such as the embattled petroleum industry in Nigeria or South Africa's indebted consumer sector. Although non-performing loan ratios within the banking sector stood at 5.4% in December 2014, up from 5.0% in 2013, we believe this is likely a lag effect from the 2012-2013 economic downturn and is unlikely to presage a decline in banks' lending appetite or a meaningful deterioration in asset quality. On the contrary, we believe that credit conditions, from both a supply and demand perspective, remain favourable thanks to improving economic conditions and the likelihood that lower inflation (due to falling fuel costs) will preclude any interest rate hikes for the remainder of 2015.

The positive outlook for lending will see interest income remain the key driver of banks' profitability over the coming years. The latest data from the CBK show that the banking sector posted a 13.3% jump in pre-tax profits, reaching KES140.9bn. Of this, interest generated from loans and advances accounted for 59.2%, with fees and commissions (18.8%) and government securities (15.1%) making up the rest.

Still Room To Grow
SSA - Commercial Banking Assets, % of GDP

Technological Advantage

Another key factor that will drive the development of Kenya's financial system, and where it has an advantage over its SSA peers, is the growing reach of MFS. Kenya is arguably a global pioneer in this field, with the money flowing through Safaricom's M-Pesa service totalling over 40% of the country's GDP. The country has a vibrant technology industry, and is far ahead of its peers, with Nairobi having become a regional hub for communications and technology investment.

While some observers have worried that the use of MMS may provide competition for traditional banks, we believe on the whole that the spread of mobile money transfers and savings products will provide a gateway for low income Kenyans to gradually adopt more complex financial services.

Regional Game

While MFS will help to underpin a gradual deepening of Kenya's domestic financial system, the sector's relative development in comparison to its East African peers provides significant opportunities for expansion. Five big banks dominate Kenya's financial system, and the largest - Kenya Commercial Bank - is already a significant player in other East African states, including South Sudan. While regional expansion can be a costly exercise that can weigh on banks' profit margins, we believe the potential rewards in markets such as Uganda and Tanzania, as well as more frontier countries, are significant.