The Central Bank of Kenya (CBK) recently cut its base rate by 75 basis points to 10 percent, aiming to stimulate lending in the private sector.
Co-operative Bank CFO Caroline Karimi weighs in on this development, discussing the bank’s next steps.
In the recent past, banks have been slow to respond to interest rate cuts by the Central Bank. What response do you predict this time, and how does your bank plan to adjust its lending strategies in response to the CBK's recent rate cuts to ensure alignment with the new monetary policy stance?
Earlier this year the bank took market leadership as you will have noted in the media and lowered the base rate with an aggressive 200bps at one instance. We have adopted a sectoral focus on lending through a deeper understanding of the Kenyan economy/lending emphasis on productive sectors. Emphasis is placed on sectors/segments with a high multiplier effect on credit such as MSMEs/trade, asset finance, agriculture, consumer, transport among others. This is done by ensuring a seamless credit origination and appraisal journey.
In the recent past (2024), banks have delayed responding to interest rate cuts on account of their deposit cost structures (especially for deposit heavy funding), asset-liability mismatches especially for FCY loans and the uncertainty around the currency and inflationary pressures in 2024.
In the current environment, inflation and currency volatility have stabilised, which have improved real interest rates. In this environment, we expect banks to respond faster than previously driven by growing confidence (on macros and clearing of pending bills), liquidity and regulatory guidance to stimulate economic activities.
Equally, the regulator has become very clear in the forward guidance on interest rates (helping banks to strategically re-price liabilities) that helps banks to support economic activities. The bank has also adopted a digital and data-driven lending approach that scopes for quality and value disbursements.
What measures is the bank implementing to balance the need for increased lending to the private sector with the imperative of maintaining credit quality, especially considering the CBK's emphasis on stimulating economic activity?
The bank continues to implement strategies geared towards increasing lending to the private sector as discussed above to segments with higher multiplier effect. To ensure a quality loan book, the Bank has operationalised a raft of measures.
Co-op Bank has a robust early warning system (EWS )and credit war rooms for risk flagging which allows corrective/mitigatory measures ahead of likely default. The bank also has significant exposure in low NPLs sectors especially the personal consumer segment which is stable and growing, with effective portfolio reallocation in low NPL sectors while using loan guarantees and co-lending with DFIs for riskier segments.
We also have a robust risk management team that conducts frequent internal stress testing to simulate risk scenarios and guides appetite.
Given the CBK's actions to lower borrowing costs, how does the bank anticipate these changes will impact on its net interest margin and overall profitability in the short to medium term?
The short-term impact will be unique across products and segments with NIMs likely to be slightly compressed in the very short-term with the rate cuts especially within segments where downward pricing pressure is highest. However, this will be offset by segments where NIMs will largely remain stable. Overall, we expect minimal impact on margins in the very short term.
Over the medium-term, as interest rate cuts filter through and stimulate credit demand, rising credit volumes will offset any margin pressure/compression. Our path forward will thus revolve around our core value of agility which will require us to balance growth, risk and returns through strategic re-pricing of our liabilities in anticipation of sustained low-rate environment, enhancing non-interest income from digital channels and others, trade finance, bancassurance and our ALM optimisation strategies.
