Analysis of Banks’s H1 2024 Earnings

Space Summary

The Twitter Space Analysis of Banks’s H1 2024 Earnings hosted by MwangoCapital. In this insightful Twitter space, an in-depth analysis of Banks's H1 2024 earnings in the East African markets was presented, offering a comprehensive overview for investors and analysts. The discussions delved into key financial indicators, regulatory considerations, and strategic insights, providing valuable guidance for decision-making. Experts elaborated on market trends, competitive landscape, and growth opportunities, emphasizing the importance of thorough research and risk assessment. The session highlighted the significance of macroeconomic factors, investment strategies, and customer-centric approaches in navigating the dynamic financial landscape of East Africa.

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Questions

Q: What were the key financial highlights of Banks's H1 2024 earnings in East Africa?
A: Detailed insights on performance metrics, revenue streams, and profitability drivers.

Q: How have market dynamics in East Africa influenced Banks's financial results?
A: Analysis of external factors affecting revenue growth, market share, and competitive positioning.

Q: What challenges and opportunities does Banks face in the East African financial landscape?
A: Discussion on regulatory hurdles, market expansion prospects, and strategic priorities for Banks.

Q: How can investors leverage the analysis of Banks's H1 2024 earnings for informed decision-making?
A: Strategies for interpreting financial data, evaluating risks, and anticipating market trends.

Q: What role does macroeconomic stability play in shaping Banks's performance in East Africa?
A: Exploration of GDP trends, inflation rates, and currency fluctuations impacting Banks's operations.

Q: What are the key takeaways for financial analysts and investors evaluating Banks's H1 2024 earnings?
A: Insights on growth potential, risk factors, and competitive advantages in the East African markets.

Q: How does Banks's position in the East African financial sector compare to its regional competitors?
A: Comparative analysis of market share, asset quality, and strategic initiatives among industry peers.

Q: What indicators should investors monitor to assess Banks's future financial performance?
A: Discussion on metrics like loan portfolios, asset quality, liquidity ratios, and capital adequacy.

Q: What impact can regulatory changes have on Banks's operations and profitability in East Africa?
A: Evaluation of compliance challenges, policy risks, and regulatory impacts on Banks's earnings.

Q: How can Banks navigate market uncertainties and maintain sustainable growth in East Africa?
A: Strategies for risk management, innovation, and market adaptation to sustain profitability.

Q: What are the key strategic priorities for Banks in optimizing its financial performance in the East African markets?
A: Insights on growth strategies, digital transformation, customer engagement, and market positioning strategies.

Highlights

Time: 08:12:45
Financial Performance Overview Detailed analysis of Banks's revenue streams, profit margins, and growth trajectory in H1 2024.

Time: 08:35:21
Market Trends Impacting Banks Exploration of market shifts, industry disruptions, and consumer behavior influencing Banks's earnings.

Time: 08:52:10
Regulatory Environment Analysis Insights on regulatory changes, compliance challenges, and legal implications for Banks in East Africa.

Time: 09:15:44
Investment Opportunities Assessment Evaluation of potential investment avenues, risk-reward scenarios, and market entry strategies for Banks.

Time: 09:45:30
Strategic Recommendations for Banks Expert advice on strategic planning, operational efficiency enhancements, and competitive positioning for Banks.

Time: 10:02:19
Stakeholder Perspectives on Banks's Earnings Interviews with industry experts, analysts, and stakeholders sharing insights on Banks's financial performance.

Time: 10:25:08
Future Outlook and Growth Projections Predictions on Banks's future growth potential, expansion plans, and market share dynamics in East Africa.

Time: 11:05:13
Competitive Analysis of Banks in the Market Comparative study of Banks's strengths, weaknesses, and opportunities vis-a-vis competitors in the regional financial sector.

Time: 11:25:30
Risk Management Strategies for Banks Recommendations on mitigating financial risks, enhancing resilience, and adapting to market uncertainties.

Time: 11:45:19
Importance of Customer Experience for Banks Insights on customer-centric approaches, service innovations, and brand loyalty strategies for Banks in East Africa.

Key Takeaways

• Insights on Banks's financial performance and market positioning in East Africa for H1 2024.
• Emerging trends and shifts in the East African market affecting Banks's earnings and growth.
• Discussion on key indicators influencing financial analysis and investment decisions in the region.
• Insights on regulatory landscape and economic factors impacting Banks and the financial sector in East Africa.
• Expert opinions on potential risks and opportunities for investors considering Banks's performance in H1 2024.
• Approaches for thorough financial research and analysis to understand Banks's earnings trajectory in East Africa.
• Importance of detailed market research and historical data in evaluating Banks's financial health and future prospects.
• Exploration of competitive landscape and market dynamics shaping Banks's earnings and growth strategies.
• Insights on investor sentiment and market expectations regarding Banks's financial results and future outlook.
• Analysis of potential implications of Banks's H1 2024 earnings on investors, stakeholders, and the East African financial sector.

Behind the Mic

Introduction to the Meeting

Hey, Ronnie. Yeah, I can hear you. Perfect. We'll start in a few. Let me get. Let me get Patricia on board. All right. As we wait for Patricia, I think. Yeah, I think she's joined. Hi. Yes, I can hear you. All right, let's get started in a second. All right. Good evening, everyone, and welcome to another edition of Mongo Spaces. We have a couple of spaces lined up this week. This is a second one of three. Yesterday we had a discussion around Macro. Today we want to dig deep a little bit into bank earnings in the first half of the year and how they performed and how, whether they reflect the earnings do reflect the state of the economy or that they have been detached from the state of the economy as it is. So, yeah, to help break that down, we have some two very able speakers, Roni and Patricia. So I'll allow them to introduce themselves. And there they work. Before we start digging into the numbers. And my name is Eric Mokaya, the founder of Mwangwu capital. So I'll start with Patricia, and then you can tell us who you are, where you are cut, and maybe a little bit about yourself.

Patricia's Introduction

Thank you, Eric. My name is Patricia. I am an investment analyst at Zyton. Just a little bit about myself. I love anything financial markets. I love diving into the numbers just to know how is the economy working and why is this doing the way it is. So, banking report is one of the things that I do as an investment analysts are mostly questions quarterly. We have our banking reports every quarter. So I'm definitely happy to be here to get into the numbers. Thank you. Yeah, definitely. We'll share a bit of a link also where people can get that in the course of the spaces. And Patricia, because there are quite few women analysts, perhaps you can speak a little bit about your experience in markets. Being female, being mostly a male dominated field has been the experience so far. Wow, that's interesting. But personally, I find it interesting. I find the industry to be quite supportive in terms of. I don't feel like, I never feel like I'm a woman in the industry. I feel like it's a very supportive industry. I've had a very supportive team to work with.

Challenges and Learning in the Industry

But all the same, there have been challenges. But I'd not say like there are challenges because I'm a woman. They're just challenges that every other analyst would face. So basically, I find it interesting that there's every. Every day there's a new thing to learn about. Like, you can, you'll never be at the top. And you'll never say you know everything about the markets. There'll be something new to learn every day. So that's why I find it quite interesting, because every day I know I learned something. Sorry, did I cut you off? No, no. All right. Good to see some lady analysts. Also in the audience. I see Namsia. I see Kate Mohimbisi. Mohimbise. And I also see Madam economist. They've joined us today on spaces. Ronnie, over to you. Tell us a bit about yourself and what you do. I know you're in between work, so maybe you can tell us a bit more. And I think my call, my analyst here at Mungo Capital tells me that we do need more lady speakers in the future.

Roni's Background

Yes, Patricia, really nice to have you. Ronnie, over to you. Maybe tell us a bit about yourself and what you do. Thank you so much, Eric. Good evening once again to love the audience. My name is Roni Choka. I have been research analyst in the Kenya, or rather East Africa financial services landscape over the past two years. My domain of coverage ranges from macroeconomics equities, specifically the banking sector, and also I do analysis of the fixed income market. It's a pleasure to be here again. So you're now one size fits all kind of analyst. Sorry, I didn't get you. You're one side. All kind of analysts. Just a joke, though. One side. Yes. So I'm on the sell side. So we cover listed equities and those public fixed income as well. All right. All right. A couple of people have joined us.

Bank Earnings Discussion

I see Saito nurse has joined Sentiguy. Bonnie, really nice to have you on board on spaces today. So we start from the high level, dig into the details and perhaps have some reflections to where the rear end. So I'll start by Patricia. Maybe you can give us your high level bird's eye view of bank earnings in the first half of the year. Patricia. Hi. I think I didn't get you correctly. So we want to take a bird's eye view first of the first half of the year in terms of bank earnings. So maybe you can give us that 30,000ft view of the ground in terms of bank earnings for the first half of the year. Okay, thank you. So in my view, I feel like the banking industry remained quite resilient during the, you can see the first half of the year comparatively with the market, or rather the economy.

Resilience of the Banking Sector

We can say that the banking industry was because we had a fluctuation of the shilling. We had high interest rates we had everything that was going on in the economy, including the inflation was, it was still settling. So I feel like the banks were still resilient because we recorded awaited growth, that is the profit after tax of at least 29% for the listed banks. So in my view that is quite commendable in terms of growth in the profit after tax for the listed banks. And in terms of the, we saw the interest income and the non interest income still record positive growth rates. And this was on the back of, mainly it was on the back of the interest rates in the economy. Because you know, when the interest rates are high, so the banks will, they will charge high interest rates for the loans that they will lend to the clients. So in that case the interest income will be high.

Income and Expenses Analysis

But on the flip of the coin is also the interest expense, which also recorded very high rates of above 60% weighted. So the two work together because as you charge high interest rates on your loans, you're also being charged high interest rates for the, by the customers that will give you the deposits. So the banks remain resilient in that the net interest income, which is a difference between the two, still remain positive. On the other side of the non interest income, which is the income that the banks get from non interest activities like effects income, it faced a little bit, or rather not, maybe very little overhead because of mainly the fluctuation of the shilling. Because when the shilling is fluctuating and in this case the shilling was gaining the margins, the effect margins will reduce. Why? Because when, if for example, the bank gets the effects, the foreign currency, they need to translate to the kenyan shilling and the shilling has gained, it means that the bank will get fewer shillings for the same, say dollars.

Challenges in Non-Interest Income

And in that case the margin will reduce. So we saw a bit of reduction in the effects margins mainly, and that led to a very slow increase in the non interest income. However, I feel like banks have been able to maintain the, or rather to tame their operating expenses despite of everything. And that's why we are able to see the positive growth in the path. And just to mention on the loan loss provisions, we've mentioned that the environment was not very conducive for the banking industry. So where does the loan loss provision come in as an expense when the loan book is not quite good? In this case, the NPLs, that is an unperforming loans for all banks. They have been skyrocketing because of the high interest rates. Because now when the interest rates are high. And as a client, I have a loan. There's a very high chance that I may face limitations in my payments.

Impact of Loan Loss Provisions

So in that case, the loan loss provision, which caters for the bad debt, will go high, and the banks record that as an expense. So a lot of banks saw that increasing, especially in the first quarter. We've seen banks reduce a bit in the second quarter, which we see as a positive. You know, we see the banks are a bit positive on the economy. Maybe that's why they are reducing the general provisions for the same, that is, for the bad debt. So in my view, I think banks have remained resilient even with the market and with the economy. That would be my introduction on the topic. Thank you. All right, Ronnie, how can banks be performing this well in an economy that is doing that badly? I think that's one of the key things that the common Monet is trying to reconcile.

Understanding the Banking Sector Performance

Okay, thank you, Eric, for your question. I think the banking sector's performance so far this year can be characterized as having been, you know, Muid or supported by a number of industry forces. Chiefly, we know beginning mid 2023, a lot of Taiwan banks got approvals to roll out credit risk based credit pricing, which allows banks to price for differentiated customer risk. This increased the pricing power of these Taiwan lenders, as you can imagine, and they've been essentially able to cost shift and a huge portion of their cost base back to clients. In as far as when you talk of the impact of a higher for longer interest rate environment we're in, that has piled pressure on the cost of funds that these banks typically experience, and the response time has been more and more instantaneous.

Market Adaptations by Banks

However, the silver lining has been that banks have been able to extend or to shift this costs to consumers via their lending margins or their interest rate margins. They price on top of their reference rates. And on top of that, we know the yields on investment securities or government securities have been on the rise across the region. That has increased the reinvestment returns that these banks are realizing. Another industry force that I think is, has helped win banking sector earnings has to be the growing financial literacy and the broader financial inclusion that the East Africa financial services landscape is experiencing. We are seeing deepening levels of mobile financial services, supporting increased usage.

Increased Non-Interest Incomes for Banks

And this usage, in turn, has increased the non interest incomes that these banks, in the form of fees and commissions and, you know, the standing charges per transaction and so on. So it's a cocktail of forces that is overall helping shift or reduce the cost, while at the same time growing the operating incomes. And finally, I think the fact that banks now have a large portion of their customer base on digital channels, this has allowed them to scale back on the brick and mortar expenses that they typically incur on a year on year. And that cost rationalization is now reflecting in the profit levels we are witnessing as of now.

Non-Performing Loans Overview

All right, Patricia, then let's double click a bit on the issue of non performing loans. There are a couple of banks like KCB which are struggling a bit with their NPL portfolios. I think there's, the industry level of NPL is I think around 16.3%, which is up from where it was early in the year and last year too. Some banks are operating above that in terms of the NPL ratio. And then some are, like Stanbeck, are managing, I think, a single digit or almost close to single digit NPL ratios. So what's the trend that you've observed across banks in terms of NPLs and how they're handling that and how that maybe reflects a bit of what's going on in the economy?

Economic Influence on Non-Performing Loans

Thank you. So for the npLs, I think it's, for me it's a direct translation of what's going on in the economy. Because when you like, currently we have banks lending rates at even 27%, 25%. So if I'm getting a loan of 25 at a rate of 25%, which is so high, I mean, the probability of a default is more likely than when I'm getting a loan at maybe a rate of 15%. So basically that's what's going on. And given that the economy is not quite rewarding to, you know, to productivity. Like when you, if you start a business today, let's say you're, you operating a business, you've taken a loan, you want to start a business. I feel like the advantage is on the bank more because they are giving you the money at a higher rate.

Challenges Faced by Startups

And our economy is bank dominated in terms of where else can you get the money. So as an individual who is starting maybe just a startup, the probability of that business doing very well and you being able to pay rather to repair a facility is not quite high, to be honest. You have very high tax rates. We have very hard operating environments in general. So I feel like even banks themselves, they know, they've done their credit risk analysis and they know that the repayment rate is quite, is not as high and as, even as you check the results for this half, like for half 120 24, you see that banks have cut on lending that is the loans to customers.

Banks' Changes in Lending Practices

A lot of banks, I think five banks of the listed banks recorded a negative growth on the loans. So banks have become very, you can say they also fearing because now the NPLs will impact your capital adequacy ratios. So for me, the NPLs is a direct translation of the high interest rates in the country and up to June, which is what we are discussing, we didn't have any rate cut, the CBR, because the CBR will affect the lending, the deposit rates for the banks. So up to June we didn't have any rate cut. We were still at 13%. So that has led to skyrocketing npLs, in my view.

Predictions and Expectations for Non-Performing Loans

I expect the NPLs to, you know, not, I don't know if the 50 bps change will have a very big magnitude in terms of npls. But as we move towards, you know, CBK talked of, you know, a framework to bring in the CBR a bit down. So as we go that route, we expect the NPLs will ease a bit. So we've seen banks now come up with better, or rather they've tightened the standards for loans. We can say that. So now they want to have, when you are taking a loan, if you've taken a loan, you know that the bank will want to know how are you going to pay this loan?

Strategies for Loan Repayment

Is it from your salary? Is it from your business? So now banks want to have another, like you have to have another option for you to get this loan if you're getting it from your salary. So they are trying to have an alternative of source of income, whether, if Covid happens, you don't have your job, how are you still going to pay this loan? And we also have the alternative sources of repayment are also available from the banks and we also have seen banks seeking alternative sources of capital. So all these are working too to rather to complement the high end peers, just to help the banks rather to how to deal with this because it's already there.

Risks Associated with Non-Performing Loans

Like we've seen KCB at 18% and when you check even the unlisted banks, we have banks even at above 40%. So above 40% is like your loan book, almost half of your loan book, you're not going to get it back. Or rather it's at the, you know, there's that risk of not getting it back. So you have to come up with a way on how to get that money back. I don't know, but the banks will have to find ways to get the money back because it will affect their capital adequacy ratios. And, you know, we have that thing by the regulator that now the capital requirement for commercial banks will be ten b from the current one b.

Changes in the Banking Industry

So that will. Will lead to a lot of, you know, a lot of changes in the industry. That is a banking industry. We are just bound to see a lot of mergers, acquisitions for the banks who will not have met that time be by the time, I think three years. By the time the three years ends. So that's my view on the npls. For me, it's a reflection of what's happening in the economy, literally.

The Impact of High Interest Rates

Thank you. Yeah. Thank you, Patricia. It seems like we lost. Seems like we may have lost. I'm back. Oh, you're back. Okay. Sorry, Ronnie. It seems like to have lost you there. A quick one, Ronnie. Perhaps because of the kind of rising npls and also banks reducing lending to customers. I think in h one, I think for a long time banks in Kenya have been accused of lazy banking.

Banks' Investment Strategies

I mean, where they park a lot of the cash in treasuries and then a nice return of 13 to, I think, 18% annually. Do you observe that trend continuing in the first half of the year, or have they changed a little bit, maybe to lend a bit more to customers? Ronnie, are you there? Yes, I'm there, Eric. Thank you. Thank you. The question of lazy banking and banks allocating higher proportions of their total assets to basically risk free assets, I think we've seen that pull back a little over the first half of this year, largely because one of the concern around issue exposure risk associated with, of course, the sovereign credit ratings.

Reduction in Investment Allocations

So we've seen a large number of Taiwan lenders scale back on their total allocations to investment securities. Kind of to put, we used to see total allocations as high as 30% of total assets being dedicated to investment securities. However, that has gone all the way down to an average of around 24%. Another aspect that is promoting this, or is supporting a redeployment of total allocations is the risk based pricing model that is currently in place, which allows banks to add a margin to the base or the benchmark risk free rates that are currently prevailing in the market.

Impact of Interest Rates on Lending

And what's interesting is that banks are recording even higher incomes or interest incomes from investment securities, from lower government security portfolios. I think we've seen that even with KCB, where they are recording growth interest incomes from government securities while at the same time having trimmed down their absolute holdings of investment securities. And this is absolutely logical because revenue is a function of both price and quantity. So that tells you automatically that yields on government securities have been dialing up really quickly.

Yield Trends in the Market

Last year we saw yields pace up a whole 600 basis points on the short end. This year, again, we've seen that, we've seen some disturbance, a little bit of easing of yields. But all in all, the general trend has been up on a year to date basis. So in terms of now, what that boils to in terms of lending to the real sector is that the increased reallocations to customer assets or lending to the private sector has only been hindered by an up pricing interest rates.

Factors Impacting Demand for Credit

So inasmuch as, yes, banks have more cash to lend the rising interest rates on these credit facilities, and there's uncertainty around the risk margins or the risk scoring methodologies that these different banks, because they are all proprietary and they are all at the discretion of each particular lender. So that uncertainty has kind of muddied the demand for credit in the real sector, which I expect should. Now the only factor that should help ease this up is competition.

Role of Competition in Banking

But, you know, the switching costs across competitors is also quite elevated. I mean, having to switch up from one bank to the other, nurture that relationship for months or years before you are entitled to know the credit levels you deserve or you really need as a business. So maybe competition will still be the defining factor going forward. All right, we are almost halfway through the conversation, so it's a good time to invite, if you have any questions for the speakers, do dm us or just below the pinned tweet, you can also write a question.

Assessment of Asset Quality

You can also just request to speak also, especially if you have a face that we can see. I think it's a good time also to have a look maybe at the asset quality on some of the banks that they are having. I think banks have been performing rather well. I think in the first half, I think in terms of the share price and all in the first half of the year. And one that particular stands out is KCB.

KCB's Performance Amid NPL Issues

Also in terms of the performance this year, despite the sticky issues in terms of NPLs and asset quality around that, one of the things that I also noticed also from the earnings is also the CFO's, quite especially CFO Stanbeck, saying that NPLs can be pretty sticky if you have them, you may have like five to ten years to deal with them in terms of securing the collateral and all those kind of things. Any observations in terms of the banks, in terms of differences in asset quality around perhaps bank specific in terms of npls or so if we circle back to that, perhaps we can start with, I think, Patricia, we lost her bit.

Trends in Rising NPLs

So, Ronnie, you can perhaps comment on that in terms of perception, especially around KCB and the NPLs and how they're handling it and how the other banks are also handling the same. Okay, Eric, I think by and large what you've had seen across the industry, and maybe if I can narrow down to the Taiwan group, is that npls have been rising across the board only with the exception of lenders like Standard Chartered and also standby holdings.

Economic Factors Affecting Different Sectors

But on average, industry wise, we've seen a rise in the NPL ratio to, I think, 16.3% as of June this year, largely driven by deterioration in the trade, manufacturing and construction sectors. We've also seen this being skewed to the SME and retail portfolios, more so than the large beer corporate and institutional lenders who have managed to hold up despite the challenging macroeconomic backdrop with KCB. Yes, it's true.

KCB's Challenges with NPL Ratios

As you point out, they're still grappling with a rise in their absolute and even the proportional NPL ratio, particularly in the sectors that have alluded to earlier. And this, however, is reinforced by the fact that they are providing more. On average, the cost of risk has been rising to account for about 2.3% of 230 basis points of the credit portfolio. So in terms of the IFRs nine coverage ratios, I think the Taiwan lenders are well insulated against adverse credit events.

Managing Adverse Credit Events

The staging is also looking pretty manageable, if I may put it that way. What now remains to be seen is how fast these lenders can intensify their collection efforts before a widespread deterioration or widespread certainty that this non performing loans ought to be, you know, written off eventually. All right, Patricia is back. Patricia, any observation, bank specific in terms of NPLs and asset quality?

Observations on Asset Quality

Patricia, are you back? Hello. Apologies for that. Yes, proceed. In terms of the asset quality for the banks. Yes. And then any specifics you may have noticed across the banks? I'm not really. It's only that for KCB, I feel like it's been sticky for quite a bit and it's been, you know, very conspicuous.

Impact of National Bank on KCB

So I feel like. But anyway, we have the. They are letting off national bank and everyone feels like it's going to have quite an impact on the. On the quality of their loan book. But generally I feel like a lot of banks have registered just an increase in npls. All right, any other observations? I think one of the key ones that perhaps before I come to any other observations, one of the key ones is also the resumption in dividend payments at KCB, a couple of banks also are nice enough to invest us to give them dividends.

Trends in Dividend Payments

Any observation in terms of trends on dividend payments and capital ratios across the banks? Perhaps you can start with you, Ronnie. Thank you. Thank you, Eric. I think by the very virtue that banks have been increasingly efficient in their operations, as signaled by the improvement in their cost to income ratios. Of course, with a few exceptions here and there, that has really increased the scope for banks to increase their interim payouts.

KCB's Dividend Payouts

Top of the chart, we know KCB issued the highest interim dividend of one shilling, $0.50, after, I think, over six consecutive quarters of a pause to restore their capital buffers. We also had standard Chartered increasing their interim offering from six shillings to eight shillings a share, even coming a quarter in advance compared to prior years. Broadly, we expect the full year dividend yields to be much higher compared to 2023 full year dividend yields.

Expectations Around Dividend and Operating Incomes

And this coming, of course, on the back of widening jaws in terms of the comparison between growth in operating incomes versus growth in costs have largely flatlined. That is, even before looking at loan loss provisions, while operating incomes have been climbing at strong double digits for the majority of Taiwan lenders. And this is also complemented by the fact that, you know, the market share that this large peer group lenders command is increasingly larger by the day as of December 2023.

Increased Market Share for Taiwan Lenders

I call the CBK banking survey revealed that now the Taiwan lenders command are 76.6% market share, up from 75% a year prior. So not only are they increasingly operationally efficient with higher scale, but they are even commanding a higher market share overall. So, broadly, the strategic factors have alluded to increased usage, increased pricing power, that these banks have largely contained cost structures. They should be able to raise their dividend payouts to even higher levels by the end of the year.

Future Expectations for Dividend Levels

Maybe you could remind me the second question you asked around dividends, and the second related to, I mean, just expectations around dividend.

Dividend Discussion

Let's see the dividend question first. Patricia, thank you. On the same question of dividends, any observations? Patricia, is there. Okay. Yes, yes. Okay. I'm saying my view would tally with what Ronnie just said. I expect to see higher, you know, payout ratios by the year ends, because when you look at the. Even the. The annualized yields for the half one, they were given good numbers compared to what we had last year. So in my view, I expect to see, because in my view, I expect to see higher profits compared to last year. Compared that we have a better operating environment with the shilling. We have the inflation rates. We expect even lower interest rates before the year ends. And given that the interest rates seem to affect the expenses more, I expect to see a reduction in the expense which will trickle down to the profits. So that will lead to higher payout ratios, in my view. So I expect to see higher dividends by the year ends compared to last year. Thank you.

Subsidiary Performance Observations

All right. All right. Yeah, we are noting down a few of the questions that are coming in. I see Tim in the audience. So, Tim, if you can join me a bit on stage a little bit, it would be nice to hear what you. What your opinion is on a couple of things. One other thing, perhaps maybe I start with you, Ronnie. A key question is about how subsidiaries are performing across board. I think one of the greatest contributor to subsidiary to group growth has been subsidiaries for most of these banks and especially critically for equity bank, which has tapped into the DRC market. Any observations across board in terms of the performances of some of these subsidiaries? Yes, Eric, I think we cannot talk about Taiwan, the story of Taiwan growth, without the broader regional picture. We know that now some banks now have increasingly higher contributions from their regional subsidiaries. Case in point, even the example you allude to, equity group, which now collectively their subsidiaries, account for 55% of pre tax earnings and Kenya only contributing 45%, despite having the majority of their assets here in their home market. And that has been a function of one aggressive marketing and customer acquisition activities in the regional markets.

Earnings Trends and Evaluations

Banks are really scaling up to the last mile, competing or replicating basically the Kenyan growth story in offshore markets, most uniquely even finding markets as geographically small as Rwanda, having collectively over 200 branches of Kenyan franchises in the space. And so that shows you how much. Of. Earnings that are yet to be captured per se, or rather the value that's yet to be unlocked across the region broadly. Even if you look at and the mix across the performance mix across the region, it's broadly balanced, on average, that basically around ten to 20% within the deviations of contributions to profitability. DRC is a very vibrant market, as it were, contributing over 35% to Kenyan or the group franchises that Taiwan peers are currently holding onto. And what we look at as a Runway, from where I sit, is that the competition will now be defined by how fast. Of course, there's a function of the financial inclusion rates. Of course, Kenya is way ahead compared to the regional peers in terms of the levels of mobile penetration. However, I think as time goes on and as necessary investments are scaled up in this affected markets, we expect increasingly higher contributions from subsidiaries. All in all, I think on an industry level, they contribute around 35% to 40% of pre tax earnings to the group franchise. Of course, there are nuances to.

Market Predictions and Interest Rates

This is a very summarized version. However, there are more nuanced factors to consider in each market. All right, Ronnie, I think maybe a phone call came in. That's why were not able to perhaps hear you towards the end. Patricia, any thoughts on subsidiaries and subsidiaries performance among the banks that you looked at? Thank you. Just to add, I appreciate the fact that banks have very, they have been very keen on diversification, which is a rule for any investment. So they will always gain that advantage from the diversification from different markets. So if Kenya is not doing very well, then we can have, you know, DRC do well for us as a group. So we've seen banks have, the banking subsidiaries, we've seen banks like NCBA go the insurance way. They acquired the AIG insurance, so that way they are able to maintain the, or rather increase and maintain their incomes, both the non income, their non interest income and also the income, the interest income. So in my view, that's a, a very good way for banks. And we also expect more expansion for the bigger banks through mergers, through acquisitions with capital calls for the smaller banks. So we expect to see more of it for the bigger banks acquiring or merging the smaller banks, which will increase their diversification effect in the industry.

Global Market Impacts and Interest Rate Predictions

That's all right. Thank you. So, yeah, so perhaps one more thing to have a look at is, I think the Fed is going to, is likely going to lower rates globally, I think, which kind of impacts the global markets next week when they meet. I think our own here, CBK, is likely also to lower rates when we, and some more as they started in the last, from the last time they met. Any perception, I think, on how that may impact markets, especially locally, as we head into the second half of the year. And perhaps it's also that point where you can also give us a bit of your outlook for the second half of the year. Ronnie, you can start with you. Thank you, Eric. I think, yes, increasing expectations of interest rates starting to come down, especially in the US, which is a key market that other markets are anchored to. And starting with the scenario of if interest rates come down this month, we do anticipate that we will see a widespread, it will totally recast the narrative altogether.

The Response of Local Central Banks

And as far as the direction of cost of funds is concerned, broadly we start to see a general easing in yields, both treasury yields and even the benchmark rates across other central banks, even here in Kenya. We do anticipate that once the US fed cuts the benchmark rate, we should have increasing expectations of our CBK going in line just to maintain the same interest rate differential to avoid the excessive pressure on the shilling, while at the same time easing the cost of debts. Overall, I think it will be a very tactical opportunity for the CBK to take advantage of in as far as lending rates, we did get confirmation from the CBK that indeed lending rates will be responsive to changes in the benchmark. So even lending rates are expected to come down, even if, at least not by tandem, we expect it to expect that downtrend generally, and that should unlock more lending or, yeah, lending to the private sector using the crowding out effect that has been taking place over the last three years. And if now the other scenario, that is, if interest rates remain higher for even longer, we should expect sustained pressure on yields.

Current Trends in Lending and Credit Growth

We expect treasury yields to remain at elevated levels for even longer. Pressure on cost of funds is likely to persist. CaSA ratios are likely to increase owing to the fact that customers are now demanding higher returns on their deposits. So that will push against the net interest margins for Taiwan lenders overall. Another factor, of course, is that lending to the private sector will largely remain diminished. We noticed the private sector credit growth. Rate coming in just at 6% when. It's been playing at very high double digits over the past decade. So that shows you the pressure on the compressed demand for credit, as it were, in the market. Yes, definitely. Patricia, any thoughts on the same. On this? I think it just trickles down to what Ronnie has said the US will affect. If the US eases the interest rates, it will affect the whole world. A lot of countries will now be in a more comfortable place to ease their rates, and the easing of rates will trickle down to more lending.

Future Lending Predictions

In my view, even the NPLs will start easing a bit as much, we say, as they stay for the long term. So I foresee increased lending to the private sector because now banks will not be so, you know, they'll not be eyeing the government securities as their best investment. So now, because normally lending to customers has more income compared to lending to the government as much as we say it's a risk-free rate for the government, lending to customers is normally it's more profitable. So we foresee a situation where banks will now increase their lending to the private sector. Currently we have the sector receiving credit growth of about 4%, which is. I don't know, we've had averages of at least. At least 13. So four is way too low as much as. Oh, Patricia, did we lose you there? Yeah, we can hear you now. Okay.

Impact of Interest Rates on Economic Activity

You can put it. Okay. Yeah. I was just saying that 4% for the credit growth for the private sector is too low. So an ease interest rates means that we are going to see more credit being advanced to the private sector, which in turn will lead to more activity in the economy, which is a positive thing. So unease interest rates now, in my view, is a positive thing because even in the US, inflation is in check and inflation, we can say even the country is in check. So in my view, it's a good time to bring the interest rates a bit low. It's hard. A lot of negative, you know, impacts in the economy currently. So it's a time to bring the interest rates a bit low. Thank you.

Final Insights and Closing Thoughts

All right. And towards the end, I think we've been joined by our local analysts here. Tim. Yeah, you are. Tim is the right of our weekly newsletter and does a lot of the analysis in the backend. So perhaps, Tim, you can also give us a few thoughts on what you picked up in terms of first half, in terms of earnings trends across banks and some of the statistics that you may have found very interesting for you. Over to you, Tim. So, yeah, thanks, Eric. So in h one, some of the key highlights that were there, in fact, the top, it's just about the regional subsidiaries anchoring earnings, because when you look for the major banks in the Kenyan operating environment, the numbers were down relative to 2023. So you see the regional subsidiaries coming in to just anchor the earnings. For instance, just for equity group in 2024, Kenya contributed 45% in profit before taxes. And when we just look at it in 2023, that was 55%. So you see 10% that it was covered by the subsidiaries.

Absa's Recent Performance

But you find that Absa, it was down and started just up marginally. So that is also a trend that you observed in the operating period. And then when you go also to the non interest income, we saw FX trading income. It took a bit of a hit. So, as a result of the developments that happened in the currency market, we found out that during the operating period, the income that was generated and through FX trading was not that significant as compared to that recorded in the other operating period. And then, in terms of returns, we saw that the dividends, interim dividends. So we saw stanch at eight shillings. And then we saw KCB resume to pay a dividend after they halted in 2023, on account of other factors, the recapitalization of KCB Bank Kenya. So it was an improvement when you compared to full year 2023 for KCB. And for, you can see it was also an increased interim dividend relative to 2023. Some same for Stanbeck and AB Saban Kenya left it unchanged.

Discussion of Closing Thoughts

So I'll pause at this point. Thank you, Tim. Quite the roundup there. Let me check if there are any questions that have come in so far, so we can. Before we. All right. Okay. It's something about DTB. I can't get the question very clearly, but perhaps now we'll go towards the closing stages of the spaces. I see Stella is in the audience, too. If you want to join us, you can join us on the stage, too. So I'll start with Patricia. Maybe you can give us your closing thoughts in terms of analysis for banks and any thoughts that you have for the second half of the year, any things that you're paying close attention to, and perhaps any of those things that you're paying attention to. And I'll come to Ronnie to ask you a specific question also. Thank you.

Patricia's Insights on Banking

So all things that I'm paying attention to, definitely, number one, is dividends, which is very key to investors. You know, investors will invest for banks, mostly they'll invest for dividends, and also we have the appreciation of the price. So that's a key thing that I'm looking at, because I'm looking for more dividends compared to last year, because now the operating environment for the banks, we can say it's better compared to last year. So that's number one of the things that I'm looking at. Number two is the cost of funds. We've seen before. We've had cost of fund on average, mainly for the listed banks. Even below, around 3.5 there. And now we have it at almost five for the listed banks. That is on weighted, you know, weighted average for the listed banks. When you look at the banks individually, we have banks with even 6%. And that's what we call the tier one banks that I find that too high because it means you are paying too much for you to get money from, you know, from. From customers.

Economic Outlook and Cost of Funds

And I feel like the money has been, you know, the customer, you know, the. The money with the customer is under too much pressure to go whether to go to the bank or to go to the T bills, to the T bonds. So I really want to see how the year ends in terms of the cost of funds, and that will trickle down to the, you know, interest expense, interest income and all that. But overall, I expect. Expect a better performance compared to 2023. I think those are my two main things, the cost of funds and the dividends payment. Overall, I think today has been a great day. Being on, you know, on this space. I really appreciate and thank all my listeners.

Challenges Facing the Kenyan Economy

Yes, thank you on that, Patricia. Before I give you Ronnie, also to give your closing thoughts, one thing that is hanging about the Kenyan economy, also something to do with the IMF, the 7th review, which has been pretty prolonged. Any thoughts on that? And perhaps you can also give us your closing thoughts in that same vein. Hello? Yes, I can hear you. Okay, nice. So, as I give my party shot, I think broadly, the banking sector has displayed tremendous resilience over the first half of the year, despite emerging shocks towards the latter end of the first half as the economy was stabilizing, largely driven by anti-government protests. Subsequently, since then, we've had credit downgrades, or sovereign credit rating downgrades, coming into the picture.

Impact of Political Issues

So that should compel a majority of banks to scale down further on their holdings of government securities, if at all. They want to preserve their cost of borrowing margins, or rather the ease at which they can acquire inexpensive credit from other lenders. And in as much as, yes, inflation is easing and we expect economic activity to tick up. That is likely to take longer than expected, going even by the PMI measurements. Apparently the political unrest over the past two months has stoked a lot of uncertainty as far as price levels, and that is the expectations of future price levels are concerned and going by. The IMF issued the IMF six reviews of the extended fund facility and extended credit facility. Certainly, of course, it's in the works. We should expect in as much as it has been prolonged. We anticipate a successful conclusion to the same.

Budgetary Measures and Future Reforms

Of course, there are a number of concessions we expect the National treasury to make. From the last review, they were discussing about privatization of national assets, including Kenya Airways and Kenya power. Maybe that can likely come much more to the fore on top of more long term tax reforms in light of the recently rejected Finance Bill 2024. So I'm sure the reason for the delay, or I'm speculating the reason for the delay in the 6th and 7th review goes to particularly that the number of complexities that have emerged over the second half of this year. Yeah, and I think now, when you put it like that, there's a lot of stuff hanging about the Kenyan economy going into the second half of the year that still remain unresolved.

Finance Act Discussion

And today, you know, there was also the hearing about the Finance Act 2023. So quite a lot of loose ends here and there that needs to be tied as we go into the second half of the year. So a quick question, Ronnie, for you. Someone has asked how low can the CBR rate go? I think there's no telling how far I can go, but I don't expect abrupt movements in the CBR at any particular convention. Maybe largely to a maximum of 200 basis points. On the downside, I expect them to maintain considerable differential with advanced markets, keeping real yields positive so as to preserve the pace at which portfolio inflows are coming into the space.

Interest Rates Outlook

I don't think the treasury would want to trade that off, even with the prospect of growth, because our forex reserves is largely the precarious level. So we still likely still remain in a higher real yield territory for much, much, at least for the next four consecutive quarters, or until we get liquidity injections that will replenish our forex reserves account. In terms of a more definitive outlook for the second half of the year, I broadly expected this inflationary trend to persist until the end of the year. Interest rates currently expect them to nudge lower, largely driven, of course, by the developments, both globally and even domestically.

Exchange Rate Stability

A low inflation outlook. Supports the case. For an easing of interest rates. In terms of the exchange rates, we've seen some stability, largely owing to the. Stewardship by the Central bank of Kenya. In spearheading reforms to the interbank foreign exchange market. Those have helped remove much of the sentimentalism that was largely driving the depreciation of a shilling last year, in my view. Yeah, the shilling has been better for many this year. Remember, we are almost going to 160 plus and then now we are at 129. So pretty good.

Final Observations from the Panel

Tim, any observations from you, maybe from that, would you take away from the first half and something that you're watching as we go into the second half of the year, perhaps as you write the newsletter, what are the. Some of the things that jumping out for you that you're watching and perhaps any perspective that you have on the IMF review also, which has been pretty delayed and prolonged. Okay, thanks, Eric. So going into the second half of the year, of course, now on the macro part of things, you can see that the CBK cut rates in its sitting on August. So it's a key indicator to watch because in the last, in that, across, across the hiking cycle during that period, they said that they are talking, the reason for the hikes was to combat inflation and also to stem the depreciation of the exchange rate, because part of the inflation was being contributed by the depreciation of the exchange rate.

Anticipated Changes in Economic Conditions

So we've seen those two variables, they've been unwinding from h one to h two. The shilling has appreciated relative to the dollar, and you can see that the inflation has also been around there. 4.34.4. It's within the CBK's target range, below the mid range. So the unwinding of those variables going into h 224, it's supposed to give some relief at a high level because now you can, other variables like extension of credit to the private sector, general lending to the economy, we expect that's going to recover. And then PMI index, we expect that we're going to get some dividend from as a result of the improving of those macros.

Fiscal Policy Updates

Another thing that I'm watching by looking at is on the fiscal, so you see the Finance Act 2023. There's still some legal deliberation going on in the courts. And then the situation of the finance Bill 24. So as a result of those developments, so looking at just the revenue numbers and whether the targets are going to be realized, that's also something I'll be looking at, given into context that revenues in July, they did not do at a faster pace relative to 2023 and relative to other years as a result of just the events that surrounded the month in terms of the fiscal. So I'll be looking at that.

IMF and World Bank Disbursement

So we'll be seeing also the IMF program. They're supposed to, there's a disbursement, the last review, but it has since delayed. But on that front, there's the World bank funding. So it will be critical to see how the distribution of the last disbursement and that the EFF and the ECF. So we'll be looking at how that goes and what that means for the economy, what it means for the fiscal and what that means in light of the downgrades that Kenya has been receiving from the credit rating agencies. I'll post at this point.

Future Discussions

Yeah, quite a lot of stuff to be tracking the second half of the year. But yeah, Tim and Roni will be here and I think we lost Patricia a little bit. All right, guys, I think we should end there for today. Thank you, Ronnie. Thank you, team, for jumping in. We hope to host you again. And Patricia, whom, who left a little bit earlier, thank you so much for joining us today on this analysis of half, 120 24 results. We will be having another spaces like this at the end of, after the Q three results are released.

Looking Ahead

Q three ends next month, actually ends this month. And then earnings should be around by the end of November. So the Q three earnings, so we should be able to analyze those. And then something else. We'll have a space is on Thursday focusing on OER and insurance. So if you have any questions, regards that Raina Namsia will be here to be hosting this and to be discussing this a bit more this week. Something else to be paying attention to is the Supreme Court hearing on the Finance Act 2023, which is happening today and tomorrow. Very important in terms of its implications in the economy and going forward.

General Observations on Banking

Yes. So on that note, really, I think my general takeaway is that banks did well in the first half of the year. I mean, we've been really hoping against hope that they don't disappoint in terms of earnings, because it's been quite a tough period in terms of economic wise, but seems like they're holding up well so far, especially the top tier banks. So if you're looking to invest, I think those are good places to start. In terms of investing, banks are generally a reflection of what's happening in the economy and in the investors wallets mostly.

Encouraging Investment and Closing Thoughts

And of course, it's also nice some of these banks come with, most of them actually come with dividends and dividend play. So it's good to keep investing. So our aim is to make sure that you enter the space of investing and make sure that you also tap into some of these earnings or just listening in, I think. On that note, unless Ronnie or Tim has any comments to add, I will close the spaces at that point. Anything from you guys, team and Ronnie? None, really.

Gratitude for Participation

Thank you so much for hosting me, Eriche. It's been a pleasure. All right, thanks, Tim. Yeah, thank you for hosting me. It's been good to be part of this discussion. All right, take care, guys, and see you again next time. Bye for now.