Well-funded Kenyan banks are set to lead regional lenders in business expansion over the next two years owing to larger capital bases and investment in mobile technology, a new report by consultancy Moody’s says. Moody’s says it expects the East Africa Community banking sector to have balance sheet growth of between 15 and 20 per cent in each of the next two years.

The growth will be driven primarily by robust GDP growth – forecast by IMF at between 6.6 per cent this year and 6.7 per cent in 2015 – the ongoing regional integration, and the mobile money revolution which is helping increase banking penetration.

“The large Kenyan banks are best positioned to benefit from growth opportunities, given their dominant, cross-border networks and advanced mobile technology capabilities.

“The integration process is creating new business opportunities for the region’s banks, mainly in trade finance (letters of credit, letters of guarantee), infrastructure project lending, foreign exchange services, as well as credit growth,” said Constantinos Kypreos, Moody’s vice-president and senior credit officer, without giving a breakdown of growth projections for the countries.

EAC’s 2013 banking sector assets totalled about Sh4.8 trillion ($54 billion), with those of Kenyan banks alone currently standing at Sh2.97 trillion. Local banks have been more aggressive than their regional counterparts in tapping the EAC market for additional business.

Leading lenders, including Kenya Commercial Bank, Equity Bank and Cooperative Bank, have opened multiple branches in Uganda, Tanzania, Rwanda and South Sudan.

“In instances where (Kenyan) banks are faced with financing demands such as those of infrastructure projects that are beyond the capacity of a single lender, there is room to syndicate the loans among different banks,” the report titled East African Community: Credit Issues for Banks says.

Kenyan lenders have also led in integration of mobile money services with their banking systems, taking advantage of the accessibility of services such as M-Pesa to reach clients without an expensive brick-and-mortar branch network and with low transaction costs. The M-Shwari product developed by Safaricom and Commercial Bank of Africa, for instance, saw the bank increase its loan accounts to 897,000 last year up from 89,000 in 2012.

KCB and Safaricom have recently launched a suite of mobile services targeting SMEs, including bank account opening, website domains as well as talk-time and text message services.

Equity Bank is also set to launch its virtual mobile network (MVNO) which will give the bank a bigger opportunity in the money transfer business currently dominated by Safaricom’s M-Pesa.

“Regional uptake of mobile money, for example in Rwanda, has been high but it has been from a low base,” said Standard Investment Bank head of research Francis Mwangi.

Profitability

In spite of the increase in balance sheet size, the banks are not expected to see a corresponding rise in profitability, as increased revenues are offset by declining interest margins, rising operating costs and high loan-loss provisions.

According to the Moody’s report, non-performing loans (NPLs) for regional banks currently range between five and 10 per cent (Kenya’s sector average is 5.7 per cent) and loan-loss provisioning coverage is at a low 40 to 80 per cent of NPLs.

The second quarter 2014 banking sector report by the Central Bank of Kenya shows that non-performing loans for local banks have risen to Sh100 billion, although this is in tandem with a rise in their loan books. This comes at a time when CBK is demanding an increase in capital cushion to mitigate risks.

“CBK in raising capital adequacy ratios is taking a precautionary measure to protect local financial institutions from external shocks and secure customer deposits in line with global trends following the 2008-2010 global financial crisis,” said Genghis Capital analyst Silha Rasugu.

Moody’s also raised concern on regional bloc’s relatively small capital bases which limit participation in the region’s growth, while shallow bonds markets constrain the ability of banks to raise long-term funding.