President Uhuru Kenyatta has declined to approve the Finance Bill 2019 and has suggested a repeal of the loan-rate cap. We regard this as a positive development as it shows the president’s commitment to the removal of the cap, a change in his position from 2018.
Following the referral of a bill back to parliament, the house will re-consider the bill, confining itself to clauses that the president has expressed reservations about. Barring the loan rate cap clause, we do no not expect any other material changes to be made to the bill once it goes back to parliament. Once the bill is on the floor of the house:
- The house could amend the bill in light of the president’s reservations;
- The house could pass the bill without making any of the president’s amendments. This requires a two-thirds majority;
- The house could pass the bill a second time with amendments that do not fully accommodate the president’s reservations. This would also require a two-thirds majority.
Once passed by the legislators, the president would have seven days to assent to the bill.
A numbers game
A quorum of 50 members of parliament is needed for a vote. The two-thirds required to pass a bill is two-thirds of the members present, provided quorum has been achieved. The outcome, therefore, is heavily dependent on the members of parliament that are present for the vote and where they stand on the matter.
That Kenyatta has refused to assent to the bill indicates that his team members in parliament have been rallying in support (in 2018, by contrast, he signed the document as it was presented to him). However, given an election is three years away and the president is not eligible for a second term, his sway on parliament overall may not be strong.
Notably, there has been minimal support for a full repeal of the rate cap from members of parliament, although there has been some willingness to consider a lifting of the cap ceiling. This, in our view, is a more likely situation, as it would represent a compromise between the president's wishfor more inclusive lending and the legislators' desire that lending rates should be controlled.
Change is likely net positive
Even if the loan rate cap is not entirely repealed and legislators opt for an amendment, we still view any changes made to the cap as net positive. We don’t expect changes to be more punitive and hence retain a positive outlook on further changes.
Equity Group set to be the biggest gainer in the event of amendment or repeal
In our report on the asset quality of Kenya banks, we ran a scenario analysis including a higher loan rate cap ceiling and determined that Equity Group would record the highest uplift in ROE, of 690bps. This is mainly due to its large high-yielding SME and retail loan book. DTB would record the lowest uplift, with a mere 350bps rise in ROE. DTB’s margins will remain under pressure due to preferential pricing, accorded to its shareholder-affiliated clients.
KCB is our top pick in the sector at a target price of KES54.00 (ETR of 32%). This is based on: 1) KCB Group’s large retail and corporate market share, boosted by the government’s shareholding in the bank; 2) the increasing contribution of non-interest revenue from alternative channels; 3) its sector-leading net interest margin; and 4) its continued high efficiency, delivering a lower cost/income ratio.