Bank performance is crucial for economic growth and development in any country. Kenya’s banking sector is often considered the backbone of the economy, as it plays a significant role in the allocation of financial resources, facilitating trade and commerce, and promoting investment opportunities.
One crucial aspect of bank performance is the risk-based loan pricing model, which is gaining traction in Kenya after the Central Bank approved Stanbic and a few other lenders to implement the model. We recently sat down with Stanbic Bank Kenya CFO Dennis Musau to explore the key drivers behind the strong performance across all revenue lines, the rationale behind the significant increase in dividends, strategies employed to maintain a high liquidity ratio, and the risk-based pricing model.
Key Drivers Behind Stanbic’s Strong Performance Across All Revenue Lines
Stanbic Holdings reported strong performance across all revenue lines, indicating growth and sustainability. Dennis Musau, Chief Finance Officer and Value Officer at Stanbic highlighted their purpose to drive growth while staying true to their values. Stanbic’s strategy revolves around three pillars: client experience, operational efficiencies, and sustaining results in client experience. Stanbic has achieved 95% digital customer interaction by investing in digital tools, resulting in operational efficiencies.
In terms of revenue, Stanbic has two broad categories: non-interest income and net interest income. Non-interest income, such as fees and commissions, contributed to the growth of key balance sheet metrics, with revenue increasing by 28% from Ksh 24.9 billion to Ksh 32.1 billion. Net interest income, which is the return on loans net of the cost of funds from interest expense, also showed double-digit growth, resulting in a 26% increase in profit after tax from Ksh 7.2 billion to Ksh 9.1 billion. The return on equity increased from 13.3% in 2021 to 15.3%, indicating strong profitability.
Rationale Behind the Significant Increase in Dividends
Stanbic’s impressive earnings were accompanied by a 40% increase in dividends per share compared to the previous year. According to Mr Musau, the rationale behind this significant increase was to reward shareholders for their trust in the bank and their contribution to its growth.
“Shareholders have provided capital through the years, which has helped Stanbic achieve sustainable growth. By rewarding shareholders, Stanbic maintains a good relationship with its stakeholders and this is reflected in the appreciation of our share price.” said Dennis Musau.
Strategies Employed to Maintain a High Liquidity Ratio
Stanbic reported a liquidity ratio of 45.2% against an industry average of about 20%, indicating high levels of trust among customers. A high liquidity ratio is crucial for banks as it allows them to meet short-term obligations and protect depositors’ funds. Stanbic’s CFO says the bank employed various strategies to maintain a high liquidity ratio, such as prudent lending practices, diversification of funding sources, and maintaining high-quality assets. By maintaining a high liquidity ratio, Stanbic ensures that customers feel safe depositing their funds with them.
The Risk-Based Loan Pricing Model
Stanbic is one of the few lenders in Kenya that have received regulatory approval to implement a risk-based loan pricing model to expand its lending operations and increase financial inclusion. According to Mr Musau, a risk-based pricing model is a transparent approach to pricing loans based on the customer’s credit risk profile. The banker says this model will empower customers to control the price at which they get credit as it incentivises them to meet their obligations, reducing their credit costs.
“The risk-based pricing model has two broad principles. The first principle is transparency, whereby banks disclose the cost of credit to customers, allowing them to make informed decisions. The second principle is customer empowerment, whereby customers have control over the price at which they get credit based on their credit risk profile.” said Mr Musau.
He believes the model will expand the bank’s ability to lend to more people, increasing participation in economic activity and growth.
While Kenya is facing challenges due to a shortage of foreign currency and the US dollar becoming stronger, Musau believes that the role of banks is to work with communities, governments, and regulators to solve macro problems. He pointed out that banks can achieve this by leveraging their expertise and resources to support economic growth and development.