FD Lawrence Kimathi says you can never cost cut your way to prosperity

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KCB Group finance director Lawrence Kimathi celebrated the growth in the bank’s balance sheet after the company reached historic milestones in total assets and net loans advanced.

KCB Group finance director Lawrence Kimathi celebrated the growth in the bank’s balance sheet after the company reached historic milestones in total assets and net loans advanced.

"Not long ago, we were celebrating crossing the Ksh1 trillion mark for total assets, today we have doubled that number," he said at an investor briefing, where the group released its third quarter results for 2023.

"We have also crossed the Ksh1 trillion mark for net loans advanced which represents a 38 percent increase (from the third quarter last year)," he explained.

Lawrence attributed the 291 percent increase in short-term funds representing Ksh530 million to the acquisition of DRC-based lender, Trust Merchant Bank (TMB).

"We are happy to report that our geographic diversification is paying dividends with a third of our assets coming from outside Kenya, up from 26 percent in the third quarter of last year," he said.

"Whereas our non-performing loans (NPL) ratio has come down from 17.4 percent in the first half of 2023 to 16.4 percent this quarter, as management we do not feel that it is coming down fast enough. The economy is still in a tough place and household incomes are strained. Improved performance in tourism and transport sectors have, however, sustained the drop in the NPL ratio," he added.

Capital cover

Lawrence admitted that the group’s capital cover particularly in Kenya was thinner than management would wish. He noted, "Our core capital was reduced last year because of dividend declarations in Kenya to fund the acquisition of TMB. But we have had growth in profits this year and our ability to generate capital has been phenomenal. We understand investor concerns about capital, but rest assured that as a systemic bank, we would be the last ones to breach regulator requirements."

The efforts of the group to preserve capital have not affected growth. However, the bank is cautious with lending in order to continue the quest to improve asset quality.

"There are stories out there that KCB is not lending and rumours that we have liquidity challenges. This is not true; we have more than enough headroom to work with as regards our risk weighted assets," Lawrence said.

Net interest margins declined to 6.3 percent from 7 percent in the comparative period last year as a result of depositors demanding interest rates that are comparable to government bonds.

"I find it funny that depositors ask us to match government which they say is risk-free when asking for competitive interest rates, yet most other times they associate KCB with government," quipped Lawrence.

Portfolio risk management

KCB Group delivered a 27 percent increase in revenue driven by government securities, customer loans, trade finance, digital transactions and the consolidation of TMB. However, their costs increased from Ksh41.6 billion in the third quarter of 2022 to Ksh60.8 billion in the same period in 2023.

"The increase in costs is as a result of a court ruling against our subsidiary NBK, which required us to make a punitive payment. We also instituted voluntary early retirement for our Kenyan bank employees which resulted in significant payments. Without these one-off costs, the increase from last year’s expense total is only 6 percent which is below inflation," Lawrence explained.

Record earnings in the third quarter saw net earnings for the nine months in 2023 increase to Ksh30.7 billion, which is marginally higher than the amount recorded in the nine months the previous year.

"Investors ask us why we take money out of Kenya. Our results answer that question. We observe portfolio risk management such that when one territory is down, others are up to cover the decline. Our international subsidiaries have performed extremely well," he explained.

Lawrence cited examples of successful subsidiaries, highlighting that KCB Tanzania had grown 157 percent year-on-year, KCB Uganda is at 129 percent and KCB South Sudan 79 percent.

"The fundamentals of our business are sound. We are growing revenue which is what is important because I always say, you can never cost cut yourself to prosperity," he concluded.

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