Kenyan bank stocks stable after signing of new law

The banking sector in Kenya faced uncertainty as banking stocks remained stable at the Nairobi Securities Exchange following the signing of a new law to cap rates above 4 per cent of the Central Bank Rate. Mercyline Gatebi, Senior Research Analyst at Kingdom Securities, shed light on the potential implications of the new legislation in a CNBC Africa interview. Gatebi highlighted the mixed reactions in the market, with consumers celebrating the interest rate capping while signaling red flags for the banking sector. The new law has raised concerns about the impact on bank performance, with expected downward slides in stock prices for major banking institutions. Gatebi emphasized that the interest rate cap could lead to a slowdown in loan book growth and compress margins, ultimately affecting profitability. The Kenya Bank Association's readiness to comply with the new law was discussed, with Gatebi noting that banks have limited options but to adhere. However, the focus remains on the potential impact on profitability, as slowed interest income growth could challenge the financial performance of banks in the coming years. Gatebi also delved into the stock market performance, with banking stocks like Equity Bank, KCB Bank, and NIC Bank ending the previous day in the red. The exposure of tier one banks to foreign investors adds to the uncertainty in the market, with expectations of continued slides in stock prices. The conversation shifted to the winners and losers in the new regulatory environment. Gatebi highlighted the potential impact on financial services like M-Shwari and Safaricom's M-Pesa, which may see lower interest rates and reduced lending volumes. Meanwhile, concerns were raised about the growth of the black market and the shift of high-risk clients to informal lenders, impacting overall banking performance. From a regional perspective, the interview explored the potential implications for commercial banks across East Africa, noting Kenya's unique position with historically attractive lending rates. Gatebi suggested that banks could leverage regional subsidiaries to offset the slowdown in the Kenyan market and drive growth in neighboring countries. The impact on existing loans and new borrowers under the new interest rate regime was also discussed, with Gatebi indicating that the cap would take effect immediately for new borrowers while existing clients would maintain their current rates. The potential impact on the Kenyan shilling was anticipated to be moderate, with possible outflows from the banking sector influencing the currency's performance. The attractiveness of deposits post-law enactment was highlighted, with the 7% interest rate expected to lure more individuals to deposit funds in banks. Gatebi noted that this increase in deposits could lead to banks investing in government securities and improving liquidity ratios. The interview concluded with insights into the expected shift in bank investment strategies and potential implications on the overall financial landscape in Kenya.