Despite having a higher retail overhead cost, top banks in Kenya are more efficient than their peers in Nigeria judging by their low cost-to-income ratio, evidence that it is more expensive to run a bank in Nigeria than in Kenya.
While the top three banks in Kenya posted an average cost-to-income ratio of 49.13 percent, the same peers in Africa’s largest economy reported 57.96 percent, according to recent data by Moody’s.
This, according to the ratings agency, together with lower provisioning requirements, supports the higher profitability of Kenyan banks.
The cost-to-income ratio is a key financial metric, particularly important in valuing banks.
To get the ratio, the operating cost (administrative and fixed costs, such as salaries and property expenses) is divided by operating income. The ratio gives investors a clear view of how efficiently the firm is being run – the lower it is, the more profitable the bank will be.
According to Ayorinde Akinloye, research analyst at Lagos-based CSL cost of banking in Nigeria remains very high from a regulatory standpoint and overhead costs continue to spiral.
“Many banks pay several dues such as the AMCON contribution which has grown significantly due to growth in assets of many banks and in Kenya, banking is rapidly becoming much more digitised due to the penetration of mobile money,” Akinloye said.
For an industry that requires power to run its operations, cost of electricity for banks in Africa’s most populous nation is one of the drivers of lenders’ high cost-to-income ratio.
From its 146th position in the previous ranking, Nigeria moved up 15 places to rank 131 out of 190 nations in the latest World Bank’s ease of doing business ranking released recently.
On the other hand, Kenya ranked 56 among 190 economies in the ease of doing business. The rank of Kenya improved to 56 in 2019, from 61 in 2018. Ease of Doing Business in Kenya averaged 98 from 2008 until 2019.
Doing business ranking is based on quantitative indicators on regulation for starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
Kenyan banks’ average net interest margin (NIM) was 8.6percent between 2015 and 2018, compared with 5.1percent for Nigerian banks. This reflects Kenyan banks’ greater focus on higher-margin retail borrowers.
By contrast, Nigerian banks’ lending is focused on the lower-margin corporate client, Moody’s rating agency said in a recent report.
Analysts are of the view that since earnings have been growing at a slow pace due to a low yield environment, Nigerian banks will have to be more efficient in the area of cost controls so that they bolster bottom line (profit).
A breakdown of the nine-month financials of Nigeria’s top lenders analysed by BusinessDay revealed that Access Bank posted a cost-to-income ratio of 63 percent. This is compared to the highest in Kenya, 52.7 percent reported by Equity group holding, one of the country’s top lenders.
In the same period under review, United Bank for Africa (UBA) with an operating expense of N161.62 billion reported 60.01 percent while Zenith bank stood at 50.11 percent, a higher cost of operation when compared to 44.7 percent for KCB Group Limited and 50 percent for Co-operative Bank of Kenya.
“Nigeria mobile banking penetration remains very low even though we are seeing improvements, this thus sees the need for adequate branches and staff,” a Lagos-based industry analyst said.
“Nigerian banks will improve their cost-to-income at a faster pace, but we expect Kenyan banks to maintain their superior profitability,” Moody’s projected.
ENDURANCE OKAFOR
