How High Interest Rates Drove Record Growth for Banks in Q1 2024

18.6% growth

According to statistical data from the Kenya Bureau of Statistics banks outgrew every other sector relative to Q1 2023, from 5.9% to 7%. Fueled by changes in the tax code and a rising base lending rate, banks were poised for success; with a tougher business environment, the banking sector saw noteworthy average growth in loans and advances to clients as businessmen grappled with changes in the business landscape.

Q1 vs. Q1

In an effort to curb inflation, the CBK has been steadily raising the base lending rate from 9.5% (end of Q1 2023) to 13% (end of Q1 2024), a 36.8% increase. This increase affected the lending market and thus banks have been flourishing as the interest rates increase & interest rate spread widen; the spread is currently at a 31-month high of 5.7%. In this environment banks have seen a 12.9% growth in terms of profitability, from KES 65.1B to KES 73.5B (according to CBK data). This can be attributed to to a combination of cost-cutting and an increase in quarterly earnings.

Best time to be owning banks

As Bobby Axelrod from Billions realized, the house always wins. Whether an economy is in a downturn or not banks will always win. Investors who bought bank stocks 2 years ago, as american fund manager Tudor Jones advices, are reaping the benefits today. With record dividend payouts for FY23, banks continue on this run, creating value for their shareholders.

One such bank is KCB which recorded 69% growth in Q1 2024 net profit, they led the pack with astounding numbers. Total revenues were up 31.6% to KES 48.5B and total assets were up 22% to a remarkable KES 2T. Strong numbers off of the high interest rates charged to clients, among other revenue generation channels. Now, these numbers as good as they are, came after a tumultuous FY23 for the company; one of their troubled subsidiaries National Bank was fined KES 2B and they also bought an 85% stake in D.R.Congo's Trust Merchant Bank which had them strapped for cash. They've since recovered and are posting great numbers relative to the same periods last year. Note: KCB didn't pay out a dividend in FY23.

Conclusion

So how are banks thriving? Due to a confluence of multiple factors; from higher base lending rates set by the CBK and changes in the business landscape through the tax code to more internal factors like great leadership and a competent team.

Resources

Banking sector report Q1 2023 , Banking sector report Q1 2024 , KNBS Quarterly GDP stats , KCB reports , Dividend payouts FY23