Banks in Kenya have been expanding branch networks across the country and region despite being in the age of digitization where most transactions happen online.
On the sidelines of Stanbic Bank Kenya’s H1 results in August, The Kenyan Wall Street sat with Stanbic Bank Kenya’s Chief Finance and Value Officer Dennis Musau for a wide ranging interview to understand the listed lender’s numbers, and why it is also making a play for more physical presence.
This interview has been edited for brevity and structure.
Non Performing Loans (NPLs) have been a major issue for the banking sector the last few years.
NPLs, admittedly, have been a challenge in the industry. We have seen them tick up and this tends to happen when interest rates are as high. Customer wallets are not as flexible as to accommodate that much of rate increases.
You would remember the last two years, interest rates have increased by about 400 basis points. So what you’re seeing in these NPLs is a reflection of that. The NPL ratio is a ratio. The numerator is the non performing quantum. That number increases with new defaults, but reduces with cures.
And if you’re not curing that number at an industry level fast enough, then it becomes sticky. If you look at the denominator, it is more flexible because that’s the amount of credit that is out there. And what we’ve seen with a slowdown in private sector credit growth starts to tell you that that denominator is not growing fast enough. So there is stickiness in the NPL quantum, there’s a slowing denominator, and therefore you end up with an NPL ratio that is elevated. 16.3% is definitely a concern.
Where do Stanbic’s numbers stand and what kind of measures are you putting in place to keep NPLs within sustainable levels?
At Stanbic, we target to keep that number at single digits. We are currently at 9.4%. We’d like to push it much lower through two things. One is curing our stock of non performing loans, but also growing the bottom line and growing it responsibly.
Diligence in origination of credit, ensuring that you’re assessing credit properly. I spoke to monitoring and working through customers, through the cycles of their businesses and their personal lives, depending on what they’ve borrowed for.
And then the third piece is collections. If and when credit goes wrong, what do you do to ensure that you, you curate? Because of that we have managed to maintain that NPL ratio at 9.4%. We closed last year at 9.47&. We closed half year last year at ~9.2.
What prompted the substantial 21.7% drop in loan loss provisioning, even with the substantial jump in NPLs?
I wouldn’t call it acute. 2.5% is average, if you like. But I like your question about the stock of loans that NPL is growing, but you’re releasing provisions. So what’s going on? Three things are happening there.
We have continued to manage gross NPLs and you would notice that we’ve oscillated between that Kshs. 22 to KShs. 25 billion for a while.
There’s a reason for that. We have a couple of names that have been sticky and we are working towards resolving them, particularly in our corporate banking space.
We’re working quite hard to deal with those. Dealing with such names is much more complex than recovering from an unsecured personal loan or dealing with a car, a defaulter.
As we work through those loans, we take provisions and build up stock of provisions and we’ve been building up our coverage ratios going back three years, coverage ratio on NPLs was about 40-45%. It’s now trending towards 70%.
The other question I have is a few things have happened in the last few days that will affect the banking sector. One being the very marginal interest rate cut, the other being that the government’s austerity measures mean that the government will borrow less from the domestic market this financial year.
Interest rate reduction is positive for the economy. I think with inflation coming to low falls, it’s an outcome of the measures that the central bank has taken, and they really done very well to anchor inflation expectations at such a low level.
The signal to cut 25 basis points is definitely very positive. We’d like the cost of credit to come down for ourselves first in funding, but also importantly for our customers, because that then would transmit to what we charge onto customers almost immediately. By the way, for some customers, where the rates are linked to market observable rates, in terms of government lending, I know I have said this a couple of times, almost 10% or less. Around 10% of our total asset base is what is sitting with the government. In terms of government securities, it goes to 1015 percent.
A big part of that is the liquidity play, because we have regulations that require us to keep some of the deposits that we collect in liquid assets, and those liquid assets are either cash or government securities.
So a big part and where we would like to spend a lot of the liquidity that we have is in actually supporting businesses such as yours with working capital to drive the good work that you do in the media industry, help a farmer in Kirinyaga with working capital to get fertilizer, someone doing fish farming. More than 50% of our balance sheet is with customers. And that is where we would like to spend a lot more of that. So government cutting spending and borrowing is also positive, because then that means the rates are going to come down.
What are your thoughts around government securities now that in the past month, especially the bond auctions which have been undersubscribed, and also coming even to August, they don’t know what’s going to happen.
The market dynamics around lending to the government continue to evolve, and it’s really just a function of two things, actually three things.
One is, is the liquidity available to investors. So in our case, for example, part of that increase you note, is on the back of a 30% increase in deposits which have not yet been drawn down by our customers.
So that liquidity availability drives the level of subscriptions that you see and and where you are on the curve is then a function of risk appetite, and that changes between industry player to industry player. The second part is, is risk capital, and I think I’ve mentioned it and spoken about it, and that’s really calibrated with the bank to bank level. There are banks that, depending on their immediate or short term, medium term liquidity needs, they would play shorter on the shorter end of the curve, and that would graduate to the long end of the curve depending on the players in the market. The third piece is then around the yield that is being offered against perceived risk.
And again, you tend to see that when there is no curve dispersion between the short end and the longer end of the curve, players would mostly stay on the shoulder of the curve, and that’s purely a market, market sentiment. It’s not, it’s nothing to do with what’s being offered. So as those three factors continue to evolve, you will see different players taking different stances. At Stanbic, I go back to the statement that I made that ours is mostly a liquidity management play, as opposed to just managing our liquidity in line With the regulations and mostly also taking opportunities as we wait for customer customer drawdowns, which is our primary kind of economic activity.
We’ve seen a trend in the last year or two, banks and players in the sector are actively working to increase branch networks and sort of evolve the issues that they have been growing in despite the fact that for banks now, 90% plus of transactions take place online. What are your thoughts on it generally as an industry practitioner, and what’s like is, is it the same strategy for standard going forward?
The view we get from our customers, especially SMEs, which drive more than 40% of the banking sector activity, is that they would like to find a place to deposit the cash. Despite a lot of digitization, we still have a largely cash economy, so the price, the physical presence, and points that you’ve seen coming up from different banks are in response to that. And it’s not an either or. It is an earned play to provide digital capabilities to make payments, to make finance, funds, transfers, to create convenience and shopping and all that. And then also create physical presence points where customers can go in and deposit the cash that they need.
We continue to see those two strands grow on our end and the CE did show this in a slide, we have increased our branch network from previously 28 now 30, and we’ll be looking for opportunities to increase that. We have increased our Agency Network significantly. Actually, we have increased our cash deposit machines, which are in demand, and we’ve continued to provide that.
We’ve continued to increase our ATM so all that sort of physical kind of arrangements continue to increase.
Alongside that, we continue to invest in our digital channels. So we just launched our new stanbic app, which authority had some glitches at the start, and is doing quite, quite well. In fact, we’ve seen more than 50% of the customers that we had in our previous version of the app already adopt the new app and increase digital activity. So it’s an under all play when it comes to physical vis a vis digital, some of the more savvy people call it a physical kind of strategy. So you have a digital and you have a physical alongside it.
We have seen a report from one of your competitors back in South Africa, titled, “Where to invest in Africa in 2024” and Kenya’s ranking has gone down a bit because of political instability. But when I really did call it an outsider perspective, how are you feeling, confidence wise? Because going for the next, let’s say age two, even the sort of social I want to call it instability, because of something else.
But do you think you have an impact on the sector?
I mean, and I’m not an authority in that, in that subject per se, so what I share is really just my perspectives. I The reality is, when you have protests akin to what we have seen, they send certain different reactions, especially for people, there’s a disruption in supply chains. If roads are blocked, then people can’t move around. Can’t move goods around, there’s actual economic activity disruption. I think we initially wanted to have this physically, and if you came physically, would have shared a cup of tea.
That cup of tea has not been purchased this morning because we have had to do this digitally because of our security assessment for the day. So there’s, there’s that kind of disruption that comes with this. I do not think, however, that is systemic enough for it to change the fortunes of the economy. Speaking to our Group Chief Executive (Joshua Oigara), who was traveling two days ago, he came to the country, and the airport was quite packed. I was also speaking to someone who runs some camps at the Mara and despite the floods that we had and some of the protests that we’ve had, the camps are still full.
