In a comparison report released on Wednesday, November 27th, 2019, Moody's said Kenya's three largest rated banks have stronger cost-to-income ratios than their Nigerian counterparts, despite their higher retail overhead costs.
The report compares KCB Bank Kenya Limited, Equity Bank (Kenya) Limited and Co-operative Bank of Kenya Limited with Nigeria's Access Bank Plc, Zenith Bank Plc, and United Bank for Africa Plc.
"Over the coming quarters, we expect Kenyan banks to maintain superior profitability to their Nigerian peers, owing to higher margins, stronger cost-to-income, and lower loan-loss provisioning costs," said Peter Mushangwe, a Moody's Analyst.
Why Kenyan banks have stronger cost-to-income ratios
Kenyan banks' lower cost-to-income ratios primarily reflect their higher net interest margins derived from their greater exposure to retail clients.
By contrast, Nigerian banks' lending is focused on lower-margin corporate clients. Additionally, funding costs for Kenyan banks stood 100 basis points lower over the same period, reflecting their wider access to retail deposits.
What does this mean for financial institutions
Kenyan banks will continue to benefit from higher net interest margins (NIMs) because of the recent removal of the interest rate cap.
On Monday, Central Bank of Kenya's Monetary Policy Committee cut interest rate to 8.50% from 9.0%. According to the apex bank committee, lowering the rate is expected to signal banks to cut lending rates to boost the supply of credit and put money in hands of consumers to increase demand for goods and services.
On the other hand, Nigerian banks' cost-to-income ratios will likely improve faster as they increase their higher-margin retail exposure while containing costs as they digitalise their operations and limit branch and staff expansion, the report stated. The CBN’s rate-setting committee held its key lending rate at 13.5%.
