This research report was prepared by the Research Department of Old Mutual Securities Limited. Old Mutual Securities Limited is a securities trading company licensed by the Capital Markets Authority (Kenya) for the purpose of facilitating trade on the Nairobi Securities Exchange.

With the Kenyan shilling having lost value by 6.9% YTD to KES 96.94/USD coupled with high inflation levels of 6.87% in May 2015, the CBR was hiked as anticipated. The CBK increased the rate by 150bps to 10.0% from 8.50% previously. Below are our expectations going forward;

  • Commercial banks to increase base lending rates - With the 150bps hike, we expect an increase albeit marginal on commercial banks base lending rates which may slow down the lending activity in the economy.  Nonetheless, we expect the banks to adjust lending rates within a very short time even though this might not be the case when it comes to adjusting the deposit rates.

  • Slowdown in loan books and rise on NPLs – With a higher cost of credit, we expect gradual slowdown on loan book growth  and a deteriorating book quality on the back of higher delinquency rates. Nonetheless, we expect the loan book growth to be driven by small and medium enterprises borrowing.

  • Higher loan book provisions– we expect commercial banks to make higher provisions on  their loan book which will exert pressure on the banks profitability and also  CBK might dance to the tune of IMF on maintaining proper checks on risk management in the banking sector.

  •  Return trade off – We expect to see an excitement on the banks’ treasury management (i.e. call deposits and fixed deposits), but a slowdown in the bond market. We further anticipate tight market liquidity going forward which means the money market yields will follow an upward trajectory in near term. The current interbank rate stood at 13.2845% from 7.0102% in the beginning of the year.

  •  Possible positive effects on the exchange – With the expectation of tight market liquidity coupled with IMF’S USD 497.1 Million Stand-by Arrangement and USD 191.2 Million Stand-by Credit Facility, we expect a relative stable shilling going forward. The level of usable foreign exchange reserves held by the Central Bank of Kenya (CBK) stood at USD 6,735 million (4.31 months of import cover) last week vis-à-vis USD 7,071 million by end of Q1:15. This indicates that CBK actively sold green backs in the market in order to stabilize the ailing shilling.

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