Banks

Kenya SpecialReport

Kenyan Banking Sector: Annual Review and Outlook

Earnings to Benefit from Improving Economy
SummaryandOutlook
Fitch Ratings expects the Kenyan banking sector to benefit from the improving economic environment in 2010, with forecasted GDP growth of 4.0%. The banking systems 2009 performance remained relatively buoyant despite the weaker operating environment due to the prolonged drought in the country and the negative economic effects of the global financial crisis, helped by reduced loan impairment charges and rapid credit growth during 2008. The agency expects that most Kenyan banks should benefit from higher levels of noninterest income and improved efficiencies in 2010, although these gains could be partially offset by margin pressures and higher credit impairment charges for certain banks. The asset quality of the Kenyan banking sector remains a weakness. The sectors Fitchcalculated nonperforming loan (NPL) ratio reduced to 6.8% at end2009 (2008: 7.3%) as further credit growth offset the increase in NPLs during 2009. Coverage ratios in the sector remain low, with specific impairments for NPLs at 51.7% at end2009 (2008: 53%). Fitch notes that the rapid credit growth reported by certain Kenyan banks since 2006 may result in deteriorating asset quality and higher impairment charges as these loans begin to season. Capital adequacy in the system should be seen in the context of the potentially volatile operating environment, loan growth levels, risk concentrations and levels of loan loss reserves covering NPLs. In addition, banks are beginning to expand into other East African countries. Given these features Fitch considers core capital ratios as being tight for a number of banks. While the banking sectors Tier 1 and total capital adequacy ratios (CARs) remained stable and appear more comfortable at 18.4% (end2008: 18.0%) and 20.6%, respectively, at end2009 (end2008: 20.2%), these ratios benefit from a couple of banks being relatively well capitalised. Moves by the Central Bank of Kenya (CBK) to phase in progressively higher minimum capital requirements is a positive trend, particularly if it results in some consolidation among the smaller banks in the system. The Kenyan government also intends to divest from public financial institutions. If this occurs, this may give further impetus to consolidation in the sector. Other positive initiatives by the CBK include the formal introduction of agent banking and antimoneylaundering legislation during 2009. The introduction of agency banking offers a more costeffective channel through which to serve Kenyas sizeable unbanked population. During 2009, the CBK also licensed its first deposit taking microfinance institution and, with eight other microfinance institutions at various stages in the licensing process, this could lead to increased levels of competition while providing individuals with improved ability to access financial services.

Analysts
Frederick Fouche +27 11 380 0915 frederick.fouche@fitchratings.com Denzil De Bie +27 11 380 0911 denzil.debie@fitchratings.com Anthony Walker +27 11 380 0912 anthony.walker@fitchratings.com

RelatedResearch
CfC Stanbic Bank Limited (August 2010)

www.fitchratings.com

9 September 2010

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Profile
Small and fragmented banking sector Increased minimum capital requirement and IT investment heighten the possibility of consolidation among smaller banks Government intends to privatise public financial institutions

Composition
The Kenyan banking sector comprised 44 commercial banks and two mortgage finance companies at end2009 (end2008: 45). The industry is concentrated, with the 10 largest banks controlling 71.9% of the banking sectors assets at end2009.

Classification
This report focuses on the 12 largest commercial banks by total assets included in the 46 Kenyan financial institutions (see Table 1), segmented into three categories: foreignowned banks, stateowned/stateinfluenced (SOSI) banks; and secondtier banks. The full list of banks is available in Annex 1.

ForeignOwned Banks
Commercial banks with foreign shareholding in excess of 50% and local branches of international institutions represented 13 of the total number of commercial banks in Kenya. The report focuses on the four largest by system assets: Barclays Bank of Kenya Limited (Barclays Kenya); Standard Chartered Bank (Kenya) Limited (Standard Chartered); CfC Stanbic Bank Limited (CfC Stanbic); and Citibank N.A. Kenya (Citibank).

Table 1: Kenyan Banking Sector Profile

Foreignowned banks Barclays Bank of Kenya Limited CfC Stanbic Bank Limited Citibank N.A. Kenya Standard Chartered Bank Limited SOSI banks Cooperative Bank of Kenya Limited Kenya Commercial Bank Limited National Bank of Kenya Limited Secondtier banks Commercial Bank of Africa Limited Equity Bank Limited Diamond Trust Bank Limited NIC Bank Limited I&M Bank Limited
Source: Fitch

SOSI Banks
SOSI banks refer to banks that have government participation and/or significant government shareholding or are influenced by the Kenyan government. The entities that will be covered in this report under this category are: National Bank of Kenya Limited (NBK; 70.6% stateowned at end2009); Kenya Commercial Bank Limited (KCB; 28.8% stateowned); and Cooperative Bank of Kenya Limited (Cooperative).

SecondTier Banks
Secondtier banks are largely privately owned and historically held a niche position, such as servicing highnetworth individuals or asset finance, before they converted to commercial banks. The secondtier banks referred to in this report are: Commercial Bank of Africa Limited (CBA); NIC Bank Limited (NIC Bank); Diamond Trust Bank (Kenya) Limited (Diamond Trust); I&M Bank Limited (I&M Bank); and Equity Bank Limited (Equity Bank).

Presentation of Accounts
Fitch has prepared this report with reference to the banks audited results announcements, prepared in compliance with CBK guidelines, and the CBKs annual banking supervision report at 31 December 2009. The agency notes that in certain instances the figures disclosed for loan loss reserves and nonperforming loans in the audited financial statements for some institutions may differ from the figures disclosed in their audited year end results announcements. This may arise as a result of different reporting requirements under International Financial Reporting Standards (IFRS) and CBK guidelines. In terms of the CBKs guidelines, Kenyan banks are required to appropriate certain retained earnings to a statutory loan loss reserve to account for the difference in loan loss reserves calculated in terms of the CBKs provisioning guidelines and IFRS.

Possibility of Consolidation
Fitch considers the key drivers of consolidation in the Kenyan banking sector will be the continuation of state divestment from public financial institutions, increasing CBK capital requirements and higher levels of IT investment. Fitch has been advised by the CBK that the Kenyan government intends to divest from NBK and Consolidated Bank of Kenya Limited (77.8% stateowned). Another governmentled initiative is the CBKs requirement for commercial banks to attain
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minimum capital levels of KES500m by end2010 (end2009: KES350m), KES700m by end2011 and ultimately KES1.0bn (about USD12.6m) by end2012 (see Annex 2). The increased capital requirements led to the merger of Southern Credit Banking Corporation Limited (Southern) and Equatorial Commercial Bank Limited (Equatorial Bank) during 2010 (see Capital). The operating efficiency of the banking sector remained almost unchanged during 2009, with the operating expenses/average assets ratio at 6.3% at end2009 (end 2008: 6.4%), which is weaker than that of more efficient banking systems. Recent IT investment by certain large Kenyan banks (see Operating Expenses), which included using mobile phone technology as a delivery channel, is likely to improve operational efficiency and customer service, promote financial access to the formally unbanked population (see Introduction of Agency Banking ), and reduce fraud losses. Consolidation of the Kenyan banking sector is also a key driver in improving the efficiency and profitability of Kenyan financial institutions. However, mergers may be hampered by the fact that many of the smallerscale banks are privately held, with owners less inclined to sell off their investments.

Recent Regulatory Changes

Credit Reference Bureau Established
The Banking (Credit Reference Bureau) Regulations, 2008, paved the way for the licensing of the first reference bureau in Kenya, namely, Credit Reference Bureau Africa Limited, in March 2010. The regulations mandate the CBK to supervise credit reference bureaux and require institutions licensed under the Banking Act to report negative borrower information. The sharing of credit information by these institutions became mandatory from 31 July 2010. The sharing of quality credit information through the bureaux is likely to help to improve risk management practices within Kenyan financial institutions and to make credit more accessible and affordable to the broader Kenyan population.

New Legislation on MoneyLaundering

The Proceeds of Crime and AntiMoney Laundering Act, 2009, which took effect on 28 June 2010, criminalises money laundering, prescribes procedures for international collaboration in investigations and proceedings, and establishes a number of related bodies. The Financial Reporting Centre (FRC) will aim to identify the proceeds of crime, assisted in an advisory capacity by the AntiMoney Laundering Advisory Board (AMLAB). The Assets Recovery Agency will seek to recover the gains derived from criminal activity. In support of these initiatives, the CBK is permitted to share bank information with fiscal, tax agencies and fraud investigation agencies. The AMLAB acts in an advisory capacity to the director of the FRC. In addition, the legislation requires reporting institutions to monitor and report suspected moneylaundering activity, to verify customer identity and to establish and maintain customer records.

Introduction of Agency Banking

Agent banking was formally introduced into Kenya by the Finance Act, 2009. The act permits financial institutions to contract CBKapproved third parties (agents) to conduct banking activities on their behalf. Agent banking offers a more cost effective channel through which to serve the formally unbanked segment, which accounted for 77.4% of the Kenyan population at end2009. Deposittaking microfinance institutions are another avenue through which the CBK aims to enhance financial access. The CBK licensed the first deposittaking microfinance institution, Faulu Kenya Limited, during 2009 following the rollout of the Micro Finance Act during 2008. At end2009, eight applications to become a
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deposittaking microfinance institution were at different stages of the regulatory approval process. Fitch expects that the competition for deposits within the Kenyan banking sector will increase as these deposittaking institutions become more prevalent.

Regional Expansion
In light of Kenyan banks regional expansion, the CBK eased its core capital restrictions in 2009, permitting institutions to invest more than 25% of their core capital in foreign institutions, subject to the CBKs prior approval.

Performance
Earnings remained healthy during 2009, in spite of low economic growth Reduced impairment charges partially offset by higher operational costs Higher noninterest income and potential for improved efficiency to drive 2010 earnings growth despite expected margin pressure Following average GDP growth of 5.4% between 2003 and 2007 (2007: 7.1%), Kenyas economic growth slowed down to 1.7% in 2008 and 2.6% in 2009 due to a prolonged drought and the negative economic effects of the global financial crisis. The drought raised the cost and reduced the availability of hydroelectricity (one of Kenyas primary sources of electricity), which translated into higher operating costs for businesses. Inflation reduced significantly during 2009, from 17.8% in December 2008 to 5.3% in December 2009. In response to the slowing economy, the CBK reduced the central bank rate from 8.5% in December 2008 to 6.75% in March 2010. Fitch expects economic conditions to improve in Kenya during 2010, forecasting GDP growth of 4.0% for the year. Kenyan banks earnings remained healthy during 2009, despite a weaker operating environment, supported by reduced impairment charges in 2009 and rapid credit growth in 2008. The banking sectors net income increased by 14.5% to KES34.5bn on the back of a 21.3% improvement in interest income from advances. Fitch calculates that the return on average assets remained flat at 2.7% (2008: 2.8%) as the improved financial performance was offset by a corresponding increase in total assets. According to Fitchs calculations, the return on average equity reduced to 19.1% at end2009 (2008: 20.5%) following the retention of profits and capital injections. Net interest income contributed 62.4% to total operating income in 2009 (2008: 59.4%). Fitch expects that the reliance on net interest income may reduce as margin pressures increase in line with lower interest rates and Kenyan banks expanded offerings of transactional products.

Net Interest Income

Net interest income increased at a slower rate in 2009, improving by 18.7% (2008: 25.7%), supported by the rapid credit growth during 2008.

Table 2: Financial Performance

Total assets 2009 2008 195,011.5 191,211.6 164,875.4 168,510.1 123,779.0 99.019.6 110,678.1 83,485.9 100,811.8 78,878.8 97,337.1 83,166.3 66,679.1 56,145.7 65,687.4 55,201.6 54,434.5 42,857.9 51,404.4 42,695.7 51,371.9 47,534.6 47,558.2 42,619.1 (KESm) Total equity 2009 2008 22,803.9 21,087.0 24,210.0 20,463.0 13,917.6 11,498.8 16,291.6 13,609.1 22,908.9 19,579.8 7,384.7 6,334.3 8,088.2 7,020.4 6,882.1 5,181.8 7,462.9 5,178.5 7,907.7 6,207.8 11,076.5 9,189.9 6,792.3 5,565.8 Net income 2009 2008 4,083.9 4,190.7 6,091.0 5,524.8 4,732.8 3,250.8 2,968.0 2,373.9 4,234.0 3,910.3 794.7 892.3 1,354.4 1,126.5 1,410.8 1,353.6 1,247.4 1,113.7 1,463.0 1,240.6 1,857.9 1,874.9 1,085.7 1,037.7 ROAE 2009 2008 18.6 24.4 27.3 30.3 37.2 29.0 19.9 23.2 19.9 22.7 11.1 16.8 17.9 18.0 23.4 27.3 19.7 24.6 20.7 22.2 18.3 22.7 17.6 20.1 (%) ROAA Cost/income 2009 2008 2009 2008 2.1 2.7 66.9 55.7 3.7 3.4 59.3 60.6 4.2 3.4 41.5 49.4 3.1 3.2 62.8 61.0 4.7 5.9 60.1 52.3 0.9 1.3 69.7 58.5 2.2 2.4 54.5 50.4 2.3 2.8 54.7 51.4 2.6 3.1 45.9 42.1 3.1 2.9 59.9 57.4 3.8 4.0 31.9 28.5 2.4 2.8 48.6 47.4

Kenya Commercial Bank Barclays Kenya Standard Chartered Cooperative Bank of Kenya Equity CfC Stanbica Diamond Trust Commercial Bank of Africa I&M National Bank of Kenya Citibank, N.A. NIC Bank
a

Figures as per the 2009 annual report Source: Banks 2009 and 2008 results announcements, Fitch

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Interest income on advances remained the primary source of interest income during 2009, contributing 75.5% of gross interest income (2008: 73.4%). Following a slowdown in credit extension and an inflow of deposits during 2009, banks channelled their surplus liquidity into government securities, comprising treasury bills and bonds. Interest income earned on government securities and interbank placements was negatively affected by a significant reduction in market rates during 2009. As a result, Fitch estimates that the industrys net interest margin reduced to 7.8% in 2009 (2008: 8.0%) as lower returns on government securities and interbank lending offset higher lending rates despite the CBKs efforts to reduce rates.

NonInterest Income
Growth in noninterest income was subdued at 4.6% in 2009 (2008: 32.6%) on account of a 9.3% reduction in foreignexchange earnings (2008: increase of 74.4%). Foreignexchange earnings weakened because of lower customer flows attributable to the negative economic effects of the global financial crisis during 2009.

Operating Expenses
Operating expenses increased by 17.4% during 2009 (2008: 27.1%). Personnel expenses grew by 16.0% as banks sought to retain highcalibre staff and managerial staff accounted for a larger percentage of the sectors staff complement at end 2009. The investment in IT infrastructure and electronic distribution channels were the main drivers of the 18.9% increase in other operating expenses (2008: 25.9%). Rising operating expenses were partially offset by improved net interest income, which limited the weakening in the sectors Fitchcalculated cost/income ratio to 58.1% (2008: 55.9%). The foreignowned banks continued to report efficiency ratios in line with the average of the sector. SOSI banks generally have higher cost/income ratios than the industry average or other categories of Kenyan banks.

Loan Loss Provisions

The industrys impairment charge for 2009 decreased by 16.3% during 2009 (2008: increase of 84.8%), despite rising NPLs (see Loan Loss Experience and Reser ves). There were some exceptions to the reduced 2009 impairment charges: NIC Bank (up 138.2%), Cooperative (up 55.8%) and Diamond Trust (up 51.8%).

Prospects
Fitch expects the 2010 financial performance of the Kenyan banking sector to improve on 2009 in light of the continuing Kenyan economic recovery, increased levels of noninterest income and lower operating costs. However, these improvements may be partially offset by margin pressures and higher credit impairment charges for certain banks. Agent banking and the banks investments in IT infrastructure and electronic banking channels should improve efficiencies and generate higher levels of transaction income. Tighter interest margins may arise from increased competition for customer deposits, reduced treasury bill rates and a migration of customer deposits to higheryielding instruments as Kenyan banks lower their lending rates during 2010. Rapid credit growth reported by certain Kenyan banks since 2006 may increase impairment charges as these loans begin to season.

Credit risk is the main risk in the Kenyan banking system Weak asset quality with increasing NPLs during 2009 Operational risk is on the increase as the implementation of numerous IT solutions gives rise to change management challenges

RiskManagement
The sophistication of risk management in the Kenyan banking industry is increasing, but remains in a developmental stage relative to global peers. However, Fitch acknowledges the CBKs efforts to facilitate greater information sharing and co operation between regional supervisors. Fitch believes that moves to consolidated

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Chart 1: Loans and NPLs
(%) 100 80 60 40 20 0 Gross loans Source: Fitch NPLs Foreign banks Secondtier SOSI Rest of sector

supervision will enhance effective monitoring of Kenyan banks as they expand regionally and their risk profiles change. Credit risk represents the primary risk type and relates mostly to domestic lending activities.

Credit Risk
Growth in gross loans (net of interest in suspense) moderated to 13.9% during 2009 (2008: 26.6%) within a difficult operating environment. Recent strong credit growth could lead to higher levels of NPLs and impairment charges as portfolios season. Five of the 12 selected banks, namely Equity Bank (up 45.0%), NBK (up 35.3%), Standard Chartered (up 30.2%), KCB (up 27.5%) and Diamond Trust (up 24.6%) reported credit growth in excess of 20% during 2009, despite a tougher lending environment. At end2009, the banking sectors lending portfolio was concentrated in terms of economic sector, with the personal/household sector (29.3% of total loans), the trade sector (17.9%), the manufacturing sector (14.0%) and the real estate sector (10.1%) as the largest sectors. At end2009, the agriculture sector accounted for 5.8% of total lending compared with the sectors 23.4% contribution to Q309 GDP. Lending to this sector may be stimulated by the introduction of crop insurance in 2010 and governments planned increase in the size of irrigated land. The loan books of Kenyas five largest banks represented about 55% of the sectors total loans at end2009. Relatedparty lending in the Kenyan banking sector accounted for 5.4% of gross loans (end2008: 4.8%). About 61.0% of these loans related to lending to the banks own employees (end2008: 60.8%). Lending for the purposes of acquiring shares by some Kenyan banks has been a recent feature, although this form of lending is not separately disclosed by banks.

Loan Loss Experience and Reserves

The Kenyan banking sectors asset quality weakened in 2009: NPLs (net of interest in suspense) increased by 5.6% to KES50.9bn at end2009, although more slowly than the 15.0% recorded for 2008. The sectors asset quality indicators, however, benefited from further loan growth during 2009, with the Fitchcalculated NPL ratio (net of interest in suspense) reducing to 6.8% at end2009 (2008: 7.3%). The sectors specific impairment coverage ratio worsened slightly to 51.7% (2008: 53.0%) as NPL growth outpaced the increase of 3.1% in loan loss reserves. Fitch considers loan loss reserve coverage to have been low at end2009. Although collateral is widely used by Kenyan banks to mitigate against credit losses, the realisation of collateral in Kenya can prove challenging, which is an issue being reviewed by the authorities. Fitch estimates that the sectors Tier 1 capital adequacy would have reduced to 15.8% at end2009 if Kenyan banks were to maintain a 100% specific impairment coverage ratio (see Capital). SOSI banks asset quality was weaker than those of foreignowned and secondtier banks at end2009, contributing 37.9% to the sectors NPLs (see Chart 1). At end 2009, the NPLs of five banks accounted for between 60% and 70% of the sectors NPLs. Fitch notes that Equity Bank (up 91.2%), Diamond Trust (up 50.0%) and KCB (up 48.1%) reported significant yearonyear increases in NPLs and considers that further deterioration is possible in light of the recent rapid credit growth.

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Table 3: Asset Quality and Capital
Gross loansa (KESm) 2009 2008 126,823.4 99,440.5 98,108.3 111,413.5 57,126.6 43,880.0 64,733.4 57,204.6 65,155.7 44,943.9 45,937.6 45,891.9 42,789.3 34,346.5 30,854.5 26,922.4 14,045.0 10,378.4 24,845.2 26,066.4 21,526.8 18,282.4 32,159.4 30,576.3 NPL ratiob (%) 2009 2008 10.0 8.6 7.6 5.9 1.8 2.4 8.2 11.5 7.4 5.6 3.4 6.5 1.4 1.1 3.9 4.1 9.0 19.0 3.4 6.7 0.6 0.7 4.4 3.4 Specific impairment coverage ratio (%) 2009 50.0 61.1 42.8 46.3 36.7 55.3 56.9 63.4 70.1 29.8 100.0 72.7 2008 68.9 50.6 54.5 65.0 29.6 52.0 71.7 55.9 72.5 10.3 100.1 60.2 Tier 1c 2009 14.8 19.1 14.1 20.3 25.8 10.3 14.8 12.1 40.9 17.0 29.0 15.5 (%) 2008 15.5 15.0 15.7 23.1 30.5 11.4 14.0 12.4 38.6 11.0 25.3 14.2

Kenya Commercial Bank Barclays Kenya Standard Chartered Cooperative Bank of Kenya Equity CfC Stanbic Diamond Trust Commercial Bank of Africad National Bank of Kenya I&Md Citibank, N.A. NIC Banke
a b c

Gross loans equals net loans plus specific provisions NPLs, as per CBK, are stated net of interest in suspense Consolidated capital adequacy, unless stated otherwise d Bankonly figures e Bankonly figures, except for tier 1 percentage which reflects the consolidated position Source: Banks, Fitch

Market Risk
Interest rate risk and foreignexchange risks are the main market risks faced by Kenyan banks. Fitch views interest rate risk to be moderate, given the shortterm nature of the sectors loans and deposits. Simple gapping analysis is used by most banks in the country to manage this risk. Foreignexchange risk is measured by the net open position of banks, which is restricted to 20% of shareholders funds by the CBK. The Kenyan banks expansion into neighbouring countries may increase unhedged foreigncurrency positions.
Chart 2: Customer Deposits
(%) 100 80 60 40 20 0 FYE09 Source: Fitch FYE08 Foreign banks Secondtier SOSI Rest of sector

While equity risk is low, the capital market issuances planned for 2010 may result in banks increasing their direct exposure to listed equities or indirectly through margin lending facilities. This might give rise to higher levels of market risk.

Operational Risk
Kenyan banks have invested substantial amounts in security since 2008 in an attempt to reduce operational risk losses. Despite this investment, the integration of new IT solutions increased the frequency and size of fraudrelated losses during 2009.

FundingandCapital
Funding
Customer deposits represent the primary source of funding for the Kenyan banking sector, accounting for about 90% of total funding liabilities at end2009. The increased contribution of customer deposits to total funding comes on the back of a 16.4% yoy increase driven by marketing campaigns, branch expansion, export receipts and foreign remittances. Customer deposits with Kenyan banks are predominantly shortterm in nature. Deposit insurance provided to individuals up to a value of KES100,000 by Kenyas Deposit Protection Fund Board represented 12.8% of the banking sectors deposits at end2009 (end2008: 14.5%). Equity Bank accounted for 14.4% of insured deposits within Kenya, with 44.8% of the banks customer deposits insured. Funding is concentrated, with the five largest deposittaking banks and the 12 featured banks accounting for about 50% and 80% of the sectors deposits, respectively.

Acceptable levels of liquidity at end2009 Planned capital market issuances in 2010 could negatively affect the sectors liquidity Tier 1 capital ratios for some banks are considered to be low given the weak impairment coverage and strong credit growth

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Liquidity
Fitch considers the liquidity of the Kenyan banking sector at end2009 to be acceptable, supported by the improvement in the sectors gross loans/customer deposits ratio to 74.3% (2008: 76.0%). The increased holdings of government securities, which qualify as liquid assets, boosted the industrys average liquidity ratio to 39.8% (end2008: 37.0%; regulatory minimum: 20%). Less attractive returns on government securities may encourage surplus liquidity to flow into some planned capital market issuances. In the past, particularly large issuances have put pressure on system liquidity, with some banks being more affected than others.

Capital
The CBKs minimum Tier 1 and total CARs of 8% and 12%, respectively, are computed on a bankonly basis. The Kenyan banking sector reported stable bank only capital ratios for 2009: the Tier 1 ratio was 18.4% (end2008: 18.0%) and the total CAR 20.6% (end2008: 20.2%). Capital levels benefited from retained profits and capital injections, with shareholders funds increasing by 18.4% (2008: 28.1%). Fitch notes that while investment in subsidiaries is impaired against capital, a bank only capital adequacy computation may not adequately capture the additional risks and changing risk profile associated with the recent regional expansion into other East African countries. The sectors average Tier 1 ratio is inflated by certain banks holding significant levels of capital in excess of the minimum: NBK (40.9%), Citibank (29.0%), Equity Bank (25.8%) and Cooperative (20.3%). In contrast, many banks reported significantly lower Tier 1 ratios. At end2009, two banks Southern and City Finance Bank Limited (City) held capital and reserves below the CBKs regulatory minimum of KES350m (see Annex 2). Southerns noncompliance with the regulatory minimum was, however, addressed by its merger with Equatorial Bank during 2010. Similarly, City has been amalgamated with a Kenyan microfinance institution during 2010. Fitch views the planned increase in the minimum levels of core capital as a positive initiative but notes that this is only likely to affect smaller institutions in the sector. Consequently it is unlikely to address the vulnerability of the banks in the system to risk concentrations, both from a sector and a single obligor perspective. Fitch considers the industrys overall level of Tier 1 capital to be low in light of low impairment coverage ratios and strong credit growth (see Credit Risk).

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Annex 1
Composition of the Banking Sector at EndDecember 2009
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 1 2 Banks Kenya Commercial Bank Limited Barclays Bank of Kenya Limited Standard Chartered Bank Limited Cooperative Bank of Kenya Limited CfC Stanbic Bank Limited Equity Bank Limited Commercial Bank of Africa Limited National Bank of Kenya Limited Citibank N.A. Diamond Trust Bank Limited NIC Bank Limited I&M Bank Limited Prime Bank Limited Bank of Baroda Limited Bank of Africa Kenya Limited Bank of India Imperial Bank Limited Ecobank Kenya Limited Family Bank Limited Chase Bank Limited Fina Bank Limited African Banking Corporation Limited Development Bank of Kenya Limited Gulf African Bank Limited Habib Bank AG Zurich KRep Bank Limited Giro Commercial Bank Limited Consolidated Bank of Kenya Limited Guardian Bank Limited Fidelity Commercial Bank Limited Victoria Commercial Bank Limited Habib Bank Limited Southern Credit Banking Corporation Limited Equatorial Commercial Bank Limited First Community Bank Limited Credit Bank Limited TransNational Bank Limited Middle East Bank Limited Paramount Universal Bank Limited Oriental Commercial Bank Limited Dubai Bank Limited UBA Kenya Bank Limited City Finance Bank Limited Charterhouse Bank Limited Nonbank financial institutions Housing Finance Company of Kenya Limited Savings and Loan Limited

Source: Fitch, CBK

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Annex2
Kenyan Banks With Capital and Reserves of Less Than KES1bn at End2009
Bank UBA Kenya Bank Limited Oriental Commercial Bank Limited Habib Bank AG Zurich Victoria Commercial Bank Limited Consolidated Bank of Kenya Limited Middle East Bank Limited Guardian Bank Limited Giro Commercial Bank Limited Habib Bank Limited Equatorial Commercial Bank Limiteda Credit Bank Limited First Community Bank Limited Paramount Universal Bank Limited Fidelity Commercial Bank Limited Dubai Bank Limited City Finance Bank Limited Southern Credit Banking Corporation Limiteda
a

Capital and reserves at end2009 (KESm) 996.0 982.0 958.0 935.0 927.0 904.0 873.0 857.0 747.0 730.0 728.0 663.0 527.0 490.0 463.0 315.0 5.0

See Capital Source: CBKs 2009 Banking Supervision Annual Report

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Kenyan Banking Sector: Annual Review and Outlook September 2010

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