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Transcript

Stanbic Holdings' FY 2024 Results · The Mwango Capital Podcast

• 0:00
  SPEAKER_00: For everyone who's joining us on the call at the moment,
• 0:02
  SPEAKER_00: thank you very much for your time and attention.
• 0:04
  SPEAKER_00: Over the course of the hour,
• 0:05
  we're going to try and dig a little deeper into the results
• 0:08
  that Stanbik Holdings
• 0:09
  SPEAKER_00: has provided for the full year,
• 0:11
  SPEAKER_00: for the 12 months in 2024.
• 0:12
  There's a lot of interesting trends and data and specific data
• 0:16
  points that,
• 0:17
  SPEAKER_00: of course,
• 0:17
  SPEAKER_00: you can look at.
• 0:18
  SPEAKER_00: Everything from NPLs,
• 0:19
  SPEAKER_00: loan provisions,
• 0:20
  SPEAKER_00: the decline in the size of the loan book,
• 0:23
  SPEAKER_00: and so on and so forth.
• 0:24
  SPEAKER_00: And we'll cover plenty of those in the course of the conversation.
• 0:26
  SPEAKER_00: So who are we talking to today?
• 0:28
  SPEAKER_00: Dennis from Sales, the Chief Financial...
• 0:29
  and value officer at stanford bank produced some fairly
• 0:33
  interesting results over
• 0:34
  the last 12 months in 2024 and we'll be diving a little deeper
• 0:37
  into the details of
• 0:38
  that dennis i want to start with the one that i know has gotten
• 0:41
  a lot of questions
• 0:42
  at least at my end of the world cost of funds questions because
• 0:45
  your interest
• 0:46
  expenses went up by over 100 last year to 21 billion shillings
• 0:50
  at least for the
• 0:51
  kenya operation but now we're seeing treasury bill rates
• 0:54
  trending lower at the
• 0:55
  SPEAKER_00: moment implying that you've
• 0:56
  If you're going to compete for capital in the market,
• 0:58
  it should cost you a lot less.
• 1:00
  Should we expect the bank to have an easier time sourcing lower
• 1:02
  cost deposits in 2025?
• 1:04
  SPEAKER_01: Thanks, Rama.
• 1:05
  SPEAKER_01: Thanks for the opportunity to dissect the numbers.
• 1:08
  And I'm glad we've got an audience to unpack some of these
• 1:11
  trends and statistics with.
• 1:13
  SPEAKER_01: Do we expect...
• 1:15
  SPEAKER_01: The cost of funding to trend downwards,
• 1:18
  maybe we answer that question as to why was it up anyway in the
• 1:21
  first place.
• 1:22
  SPEAKER_01: And I think you've touched on it.
• 1:24
  When instruments yields,
• 1:26
  particularly government yields in the market are high,
• 1:30
  depositors,
• 1:31
  especially those who look for yields,
• 1:34
  divest towards those instruments.
• 1:37
  The rates in 2024 and actually in part 2023 were of such
• 1:43
  significance that it
• 1:45
  SPEAKER_01: didn't make a lot of sense to keep a lot of
• 1:48
  quote-unquote,
• 1:48
  idle cash,
• 1:49
  whether as an individual or as a business in a current account.
• 1:53
  SPEAKER_01: So current accounts were generally anemic.
• 1:56
  SPEAKER_01: Most of them are staying relatively dry,
• 1:59
  and people then put money into savings accounts and fixed
• 2:02
  deposits and a government internet,
• 2:05
  SPEAKER_01: depending on their appetite.
• 2:06
  SPEAKER_01: With rates coming down,
• 2:07
  SPEAKER_01: definitely we do expect,
• 2:09
  and we have started already seeing that on my monthly tracker
• 2:12
  of the interest
• 2:13
  SPEAKER_01: expense coming down.
• 2:15
  SPEAKER_01: It also does transmit onto the cost of lending.
• 2:18
  SPEAKER_01: So you'd have seen banks announce some rate cuts,
• 2:21
  SPEAKER_01: and that's partly because our pricing models are mostly cost-plus models.
• 2:25
  So it's cost of funding plus a few other costs the moment you
• 2:28
  get to your pricing.
• 2:29
  So definitely we expect lower cost of funding,
• 2:32
  and yes,
• 2:32
  we also do expect lower gross income.
• 2:35
  And therefore,
• 2:35
  we may then end up having minimal,
• 2:38
  if any,
• 2:38
  change to the net interest margin.
• 2:41
  SPEAKER_00: And that sort of answers in part my next question,
• 2:43
  because that's where we're heading to next in that question
• 2:46
  around the outlook for
• 2:47
  SPEAKER_00: net interest margins in 2025.
• 2:49
  SPEAKER_00: Because on one hand, as you've said, the cost of funds looks to decline.
• 2:53
  SPEAKER_00: And then look at the demand side of the business,
• 2:55
  SPEAKER_00: demand for credit,
• 2:56
  SPEAKER_00: both short term,
• 2:57
  SPEAKER_00: long term,
• 2:57
  SPEAKER_00: and so on and so forth.
• 2:59
  SPEAKER_00: It was very subdued last year.
• 3:00
  SPEAKER_00: In fact,
• 3:01
  SPEAKER_00: I believe at some point last year,
• 3:02
  SPEAKER_00: towards the end,
• 3:02
  SPEAKER_00: I think in Q3 or Q4,
• 3:05
  SPEAKER_00: the credit growth actually turned negative.
• 3:07
  SPEAKER_00: Should we expect this trend that we saw this year,
• 3:09
  SPEAKER_00: that decline in net interest margin,
• 3:11
  SPEAKER_00: will that continue this year or should we expect a bit of stability?
• 3:14
  I think the growth of private sector credits is part of a
• 3:18
  social contract that
• 3:20
  SPEAKER_01: banks have with society.
• 3:22
  SPEAKER_01: We collect deposits on one side.
• 3:25
  It is our responsibility as banks to avail that liquidity for
• 3:29
  real economic
• 3:30
  SPEAKER_01: activity in the market through lending.
• 3:32
  So any banker out there is thinking,
• 3:36
  how do we drive private sector credit growth?
• 3:39
  The levels that we saw at the end of last year at just below 1%,
• 3:43
  we last saw that in 2020.
• 3:47
  SPEAKER_01: 11 or 2012, at least more than 10 years ago, we were used to 13%, 14%.
• 3:52
  SPEAKER_01: And if you think about it,
• 3:55
  you want your private sector credit growth to be above the GDP
• 3:58
  so that you're
• 3:59
  SPEAKER_01: driving expansion.
• 4:00
  So definitely all of us are thinking about how much do we need
• 4:04
  to do and to drive that.
• 4:06
  SPEAKER_01: Part of that is thinking about cost of credit.
• 4:08
  SPEAKER_01: Now, you've heard about bank rates and base rate, CTCTC.
• 4:13
  SPEAKER_01: But when I did some subtle survey last year,
• 4:16
  SPEAKER_01: credits touched anything between 15% and more than 25%.
• 4:22
  And it's quite difficult to invest in a business where your
• 4:25
  returns are expected to
• 4:26
  SPEAKER_01: be more than 25%,
• 4:28
  SPEAKER_01: and you haven't even paid yourself,
• 4:30
  SPEAKER_01: you haven't paid salaries,
• 4:31
  SPEAKER_01: etc.
• 4:32
  SPEAKER_01: So that delayed a lot of investment decisions.
• 4:34
  SPEAKER_01: And what we are hoping to see with rates coming down,
• 4:37
  SPEAKER_01: T-bill rates have come down close to 600 basis points.
• 4:40
  SPEAKER_01: I genuinely hope that we can see cost of credit coming down by similar,
• 4:45
  SPEAKER_01: if not the same kind of margin,
• 4:47
  SPEAKER_01: so that we can start sparring.
• 4:49
  SPEAKER_01: That said,
• 4:49
  SPEAKER_01: of course,
• 4:50
  SPEAKER_01: and I'm sure the question of how we price credit will come up,
• 4:53
  SPEAKER_01: so they may probably defy it to then.
• 4:56
  But we really just have to work out how to ensure that credit
• 5:00
  out there starts to pump again.
• 5:02
  SPEAKER_00: But even leaving the cost of credit aside for the moment,
• 5:05
  SPEAKER_00: just looking at the wider macroeconomic picture,
• 5:08
  SPEAKER_00: I'm not sure what data sets you might be able to see,
• 5:11
  SPEAKER_00: but if you just look at the broader picture across the entire economy,
• 5:14
  SPEAKER_00: if you use fuel,
• 5:14
  SPEAKER_00: for example,
• 5:15
  SPEAKER_00: as a proxy indicator,
• 5:16
  SPEAKER_00: fuel consumption last year dipped by quite a bit.
• 5:18
  SPEAKER_00: In fact, if you look at diesel consumption alone for 2033, 2024,
• 5:23
  It's fallen rather to levels that we didn't even see during the
• 5:26
  pandemic around 2020,
• 5:28
  2021.
• 5:28
  SPEAKER_00: So if we use indicators like that,
• 5:30
  SPEAKER_00: or if we try and use proxies,
• 5:31
  SPEAKER_00: the importation of border borders,
• 5:33
  SPEAKER_00: if we go back to the same timeline that you used a little earlier,
• 5:36
  SPEAKER_00: 2014,
• 5:36
  SPEAKER_00: 2013,
• 5:36
  SPEAKER_00: and so on and so forth,
• 5:39
  SPEAKER_00: we've been importing about 13,000,
• 5:41
  SPEAKER_00: 14,000 units every single month into this country.
• 5:44
  SPEAKER_00: Last year, it was probably around 5,000, 6,000 units a month at best.
• 5:49
  SPEAKER_00: So the indicators I see,
• 5:51
  SPEAKER_00: the ones I look at,
• 5:52
  just suggest to me that there simply isn't any disposable
• 5:55
  income available in this
• 5:57
  SPEAKER_00: economy at the moment.
• 5:58
  SPEAKER_00: So even if,
• 5:59
  SPEAKER_00: for the sake of argument,
• 6:00
  SPEAKER_00: rates do come down,
• 6:01
  SPEAKER_00: is private sector credit demand still there?
• 6:04
  Or should we expect another year when we look at Stanby's books
• 6:07
  in six months,
• 6:08
  SPEAKER_00: nine months,
• 6:09
  SPEAKER_00: 12 months time,
• 6:10
  SPEAKER_00: and your loan book has contracted again?
• 6:12
  SPEAKER_01: If I go back during COVID time,
• 6:15
  SPEAKER_01: I think 2020,
• 6:17
  SPEAKER_01: 2021 is the last time our balance sheet stayed flat year on year.
• 6:24
  SPEAKER_01: So in 2020,
• 6:25
  SPEAKER_01: 2021,
• 6:25
  our balance sheet was $328 billion one year and $328 billion
• 6:29
  the next year,
• 6:30
  SPEAKER_01: changed by a few hundreds of thousands.
• 6:31
  SPEAKER_01: In 2022, our balance sheet grew by 22%.
• 6:36
  SPEAKER_01: What happened?
• 6:37
  SPEAKER_01: There was real pent-up demand for credit post-COVID.
• 6:42
  SPEAKER_01: There was almost revenge investment,
• 6:45
  SPEAKER_01: revenge spending,
• 6:45
  SPEAKER_01: revenge holidays for people who had been held up by the COVID pandemic.
• 6:51
  SPEAKER_01: What's the difference between then and now?
• 6:53
  SPEAKER_01: There were actually tax incentives.
• 6:55
  SPEAKER_01: We didn't see taxes increasing.
• 6:57
  SPEAKER_01: If anything, I think there was actually rate decreases at the time.
• 7:01
  SPEAKER_01: So
• 7:01
  There was real demand awaiting the episode to end and for
• 7:06
  spending to come through.
• 7:08
  It's not necessarily the same around this tide because we're
• 7:12
  saying rate come down.
• 7:14
  SPEAKER_01: Okay, that's one variable.
• 7:15
  SPEAKER_01: But then there is the size of customer wallets, which was drive spending.
• 7:20
  SPEAKER_01: So am I expecting a 22% increase on the balance sheet in 2025?
• 7:24
  SPEAKER_01: No.
• 7:25
  SPEAKER_01: No.
• 7:26
  SPEAKER_01: But am I expecting some growth?
• 7:28
  SPEAKER_01: Yes.
• 7:29
  SPEAKER_01: And I will also give a ride as to what could happen to not achieve that.
• 7:34
  But part of what I am saying is informed real and actual
• 7:38
  customer conversations
• 7:39
  SPEAKER_01: that we have progressively.
• 7:40
  SPEAKER_01: Where customers are saying, we can't borrow now, I can't invest now.
• 7:44
  SPEAKER_01: I normally do three containers in my trade.
• 7:48
  SPEAKER_01: Because of the rates being high, I've now reduced that one container.
• 7:53
  And if cost of credit starts to come down,
• 7:55
  I'm going to go back to two containers and forth.
• 7:58
  SPEAKER_01: So there is real, actual economic activity that backs this.
• 8:02
  SPEAKER_01: The data points you share are real and true,
• 8:04
  SPEAKER_01: but there are also data points that say TE exports,
• 8:07
  SPEAKER_01: for example,
• 8:08
  SPEAKER_01: have reached a significant high in the last year.
• 8:10
  SPEAKER_01: So there are pockets of dim lights.
• 8:13
  SPEAKER_01: There are also some other pockets of bright lights.
• 8:16
  SPEAKER_01: What could cause this to become more problematic is, and it's twofold.
• 8:22
  SPEAKER_01: So global policy, I do honestly hope that the instances that the U.S.
• 8:27
  is taking do not start manufacturing new wave of inflation at a
• 8:32
  global level,
• 8:33
  SPEAKER_01: which of course will come down to rates increasing.
• 8:36
  So I do hope some level of adult provision goes on quickly and
• 8:41
  the countermeasures
• 8:42
  SPEAKER_01: start to feed back
• 8:44
  SPEAKER_01: to its policy and ease at that.
• 8:45
  SPEAKER_01: So that's actually my biggest fear.
• 8:47
  One of my bigger fears is whether we manufacture new wave of
• 8:51
  innovation quickly at
• 8:52
  SPEAKER_01: a global level.
• 8:53
  And then locally,
• 8:54
  there is still quite a bit to be unraveled about government spending.
• 8:59
  SPEAKER_01: You'd have seen the BPS and the expected spending in 2526.
• 9:02
  It's still not very clear where we are going on government
• 9:07
  borrowing and fixing the
• 9:08
  SPEAKER_01: fiscal deficit.
• 9:10
  SPEAKER_01: It's also not very clear where we're going with the IMF program.
• 9:13
  If any of that means more local borrowing,
• 9:16
  and therefore rates start to turn upwards.
• 9:19
  Inflation has started turning upwards,
• 9:20
  but it's still not yet at a point that is alarming.
• 9:23
  SPEAKER_01: But if rates start peaking, Rama, you know where this is going to go.
• 9:26
  SPEAKER_01: So we're going to get quickly back up to where we were last year,
• 9:29
  SPEAKER_01: which is really not what we want to see.
• 9:31
  The other thing that I'm not sure if it falls into the same
• 9:34
  risk matrix for you as
• 9:35
  SPEAKER_00: it does on our end of the pond would be tax policy,
• 9:38
  SPEAKER_00: right?
• 9:39
  Because yes,
• 9:39
  you've covered where the BPS is in terms of government spending.
• 9:43
  SPEAKER_00: And before you even get to the budget policy statement,
• 9:45
  if you just look at the supplementary budget that was submitted
• 9:47
  to parliament at
• 9:48
  SPEAKER_00: the moment,
• 9:48
  there's some really big increases in spending that the state is
• 9:51
  asking for in that
• 9:52
  SPEAKER_00: document too.
• 9:54
  SPEAKER_00: From where you stand,
• 9:55
  SPEAKER_00: given what we saw last year,
• 9:57
  SPEAKER_00: the proposal to essentially impose more taxes on individuals,
• 10:00
  SPEAKER_00: and that triggered this massive decline,
• 10:01
  and we actually saw it in the PMI data that your economists and
• 10:04
  the guys at S&P put together,
• 10:07
  SPEAKER_00: huge decline in spending and inventory and so on and so forth.
• 10:11
  Is that still an existential threat,
• 10:13
  so to speak,
• 10:14
  to private sector credit growth going forward?
• 10:17
  SPEAKER_01: I think it is.
• 10:18
  SPEAKER_01: I think what we have seen,
• 10:20
  SPEAKER_01: political leadership after political leadership,
• 10:22
  SPEAKER_01: there is an affinity,
• 10:24
  SPEAKER_01: at least this part of the world,
• 10:27
  SPEAKER_01: to lead fiscal consolidation through revenue measures.
• 10:31
  So the easiest attack vector has been raise more revenue,
• 10:35
  tax people more,
• 10:36
  it is CKC.
• 10:38
  SPEAKER_01: And the argument is not don't tax people,
• 10:40
  but it appears to me also that taxing is on a smaller and
• 10:45
  smaller base now.
• 10:47
  If I say increase VAT,
• 10:48
  I'm sure a few people will log off this call because that's not popular.
• 10:53
  SPEAKER_01: But is that what we need to broaden the tax base?
• 10:55
  SPEAKER_01: I don't know.
• 10:56
  SPEAKER_01: But I think there needs for some revenue-led fiscal consolidation.
• 11:01
  SPEAKER_01: But we actually do need to see some...
• 11:03
  SPEAKER_01: expenditure rationalization on the part of government.
• 11:06
  And again,
• 11:07
  it's one of those painful things to do and to lead it as a politician.
• 11:12
  But the reality is we are increasingly making it very difficult
• 11:18
  to sustain our
• 11:19
  SPEAKER_01: level of expenditure,
• 11:21
  SPEAKER_01: the size of our budget,
• 11:23
  and therefore that just is increasing the pressure on
• 11:27
  individual and corporate wallets.
• 11:29
  SPEAKER_01: And that is actually evident in some of the macros that we are seeing.
• 11:34
  SPEAKER_01: The latest print of GDP growth,
• 11:37
  SPEAKER_01: Q3 2024,
• 11:38
  showed that the last time we saw manufacturing expansion at
• 11:42
  where it is was during COVID,
• 11:44
  SPEAKER_01: Q3 2020.
• 11:47
  SPEAKER_01: Now,
• 11:47
  SPEAKER_01: that's scary,
• 11:48
  SPEAKER_01: guys,
• 11:48
  SPEAKER_01: because if you look at our regional competitors,
• 11:52
  SPEAKER_01: Uganda,
• 11:52
  SPEAKER_01: Tanzania,
• 11:53
  SPEAKER_01: their manufacturing,
• 11:54
  SPEAKER_01: although it's still
• 11:55
  are low,
• 11:56
  but the level of expansion seems to be ticking up quite quickly.
• 12:00
  SPEAKER_01: The level of FDI that is going to Uganda particularly.
• 12:04
  SPEAKER_01: Uganda,
• 12:04
  SPEAKER_01: if you adjust their growth aspirations for some of these factors,
• 12:08
  SPEAKER_01: what might come from the ECOP,
• 12:10
  SPEAKER_01: which is closer to 50% completed,
• 12:12
  SPEAKER_01: Uganda very soon will be growing at double digits,
• 12:16
  SPEAKER_01: 9-10% or thereabout.
• 12:17
  So there's something about how we are planning our spending,
• 12:20
  how we are balancing
• 12:22
  SPEAKER_01: Revenue measures vis-à-vis expenditure,
• 12:25
  SPEAKER_01: and even in the expenditure,
• 12:26
  SPEAKER_01: how we are balancing the equation between recurring expenditure vis-à-vis
• 12:30
  SPEAKER_01: expansionary or investment expenditure.
• 12:32
  SPEAKER_01: That needs to be re-looked.
• 12:34
  SPEAKER_01: And then when people then are contracted, they need to be paid.
• 12:39
  You will realize that there's a lot that happens when you just
• 12:42
  pay people because
• 12:43
  SPEAKER_01: Peter pays Tom,
• 12:45
  SPEAKER_01: Tom pays Dennis,
• 12:46
  SPEAKER_01: Dennis pays Rama,
• 12:47
  SPEAKER_01: and there's money in the market.
• 12:48
  SPEAKER_00: Indeed,
• 12:48
  SPEAKER_00: and that actually brings me to NPLs quite neatly,
• 12:51
  because looking at the annual changes in the size of
• 12:54
  non-performing loans that you
• 12:55
  SPEAKER_00: have on the books,
• 12:56
  SPEAKER_00: the gross NPLs,
• 12:57
  SPEAKER_00: those are down 14.4%.
• 12:58
  SPEAKER_00: The net NPLs, those are down by 18%.
• 13:01
  SPEAKER_00: But your loan loss provisions,
• 13:03
  SPEAKER_00: those are down by 51%,
• 13:05
  SPEAKER_00: down from 7.3 billion to around 3.5 billion shillings last year,
• 13:09
  SPEAKER_00: which effectively covers around 20-something percent of the bank's net
• 13:13
  SPEAKER_00: non-performing loans.
• 13:15
  SPEAKER_00: Walk us through the rationale here for your provisions,
• 13:17
  SPEAKER_00: because as an outsider,
• 13:18
  SPEAKER_00: if we just looked at those numbers,
• 13:19
  SPEAKER_00: by implication,
• 13:21
  my reading of it would be management and the board reckons that
• 13:24
  the worst of this
• 13:25
  is probably behind them and they don't need to be provisioning
• 13:27
  as much capital
• 13:28
  SPEAKER_00: because future risks are not as high as they were two,
• 13:31
  SPEAKER_00: three years ago.
• 13:33
  SPEAKER_01: Yeah, looking at them, they could send the wrong signal.
• 13:36
  SPEAKER_01: So let me unpack our NPL.
• 13:38
  SPEAKER_01: So our NPL, when we closed last year, was 9.47.
• 13:43
  SPEAKER_01: Last year in Accountants World, a year in area.
• 13:46
  SPEAKER_01: So I'm talking 2023.
• 13:47
  SPEAKER_01: And then we closed 2024 at 9.11% in NPL ratio.
• 13:53
  SPEAKER_01: Our coverage ratio,
• 13:54
  which is the level of provisions that you're holding against
• 13:59
  your non-performing
• 14:01
  SPEAKER_01: credits in 2023 was 63%.
• 14:06
  SPEAKER_01: End of 2024 was,
• 14:08
  SPEAKER_01: in theory,
• 14:09
  SPEAKER_01: our level of optimism hasn't quite changed,
• 14:12
  but neither have we increased our level of pessimism in terms
• 14:16
  of ability to recover.
• 14:18
  SPEAKER_01: So what has happened?
• 14:18
  SPEAKER_01: Why are the numbers year on year in terms of the P&L charge changing?
• 14:22
  SPEAKER_01: Three things.
• 14:23
  Number one is in 2023,
• 14:25
  included in that 6.2 billion government charge number.
• 14:33
  SPEAKER_01: some chunky names,
• 14:34
  particularly in our business and commercial client segment of
• 14:38
  the business,
• 14:39
  SPEAKER_01: that we took additional provisions.
• 14:41
  SPEAKER_01: Those are those names that follow the cliff.
• 14:44
  SPEAKER_01: And remember, 2023 is actually when rates started picking up.
• 14:48
  SPEAKER_01: So we saw some of those names go under extreme stress between the
• 14:53
  SPEAKER_01: Q2, particularly of 2023 and Q3.
• 14:57
  SPEAKER_01: And therefore, we took a view to increase the provisions.
• 15:00
  SPEAKER_01: So there is a base effect included in there.
• 15:02
  SPEAKER_01: So that's the first factor.
• 15:04
  SPEAKER_01: The second factor is if you come to 2024 and you look at the provisions,
• 15:08
  SPEAKER_01: those provisions are currency adjusted.
• 15:10
  So we've got close to 700 million credit note purely because of
• 15:14
  the currency resetting.
• 15:17
  SPEAKER_01: What does that exactly mean?
• 15:18
  SPEAKER_01: So 45% of our non-performing loans are in foreign currency.
• 15:23
  SPEAKER_01: dollars, say euros and GDP here and there.
• 15:25
  SPEAKER_01: But the main numbers are in USD.
• 15:27
  SPEAKER_01: So the Kenya shillings appreciates against the USD.
• 15:31
  Because you are carrying the Kenya shillings equivalent of the
• 15:34
  provisions that we need,
• 15:36
  SPEAKER_01: you basically then get a currency appreciation credit,
• 15:39
  SPEAKER_01: not all of that.
• 15:40
  SPEAKER_01: So that second one.
• 15:41
  SPEAKER_01: The third one is just the reduction in the loan book.
• 15:45
  Because your loan book has effectively contracted and under
• 15:49
  IFRS 9,
• 15:50
  the accounting standard,
• 15:52
  You carry impairment on all your loans,
• 15:54
  including the one that you originated yesterday.
• 15:57
  SPEAKER_01: There's a reduction in what we call general debt provision.
• 16:01
  SPEAKER_01: So those three factors actually explain the year-on-year movement.
• 16:04
  SPEAKER_01: But what's my comfort?
• 16:05
  SPEAKER_01: Our coverage ratio remains pretty much where it was.
• 16:09
  SPEAKER_01: And if anything, I'm seeing more traction in resolving the names.
• 16:13
  SPEAKER_00: With respect to NPLs, can we get into a bit more detail there?
• 16:16
  SPEAKER_00: Are there any specific sectors in which...
• 16:19
  SPEAKER_00: They're concentrated.
• 16:20
  The factors that drove them to where they were,
• 16:22
  some of them are now coming off.
• 16:23
  Like you pointed out,
• 16:24
  the rate hiking cycle was partly a contributor to what happened.
• 16:27
  When people are essentially looking at borrowing rates of 20
• 16:29
  something percent,
• 16:30
  SPEAKER_00: obviously that becomes significantly painful.
• 16:33
  SPEAKER_00: Where they concentrated,
• 16:34
  SPEAKER_00: have those risk factors that essentially drove them upwards,
• 16:37
  SPEAKER_00: have they now tailed it off?
• 16:39
  SPEAKER_01: So two particular sectors,
• 16:41
  SPEAKER_01: I wouldn't actually say other than for the ones that fell off in 2023,
• 16:46
  SPEAKER_01: no new factors have come to impact those NPS.
• 16:49
  SPEAKER_01: A lot of that credit is actually 2016 to 2019 lending.
• 16:56
  SPEAKER_01: And it's largely in project finance,
• 16:58
  manufacturers building or setting up new industries or new
• 17:03
  operations or extending
• 17:04
  SPEAKER_01: their operations.
• 17:05
  And then something turns in the market and that which was a
• 17:08
  viable investment doesn't work out.
• 17:11
  SPEAKER_01: So actually,
• 17:12
  SPEAKER_01: when I look at the 22 billion,
• 17:14
  SPEAKER_01: there's nearly 40% that is in that whole project finance area.
• 17:19
  SPEAKER_01: There's another double digit percentage that is
• 17:23
  In commodities,
• 17:24
  in agricultural commodities,
• 17:25
  so agriculture-related,
• 17:27
  about two names there.
• 17:28
  SPEAKER_01: We don't have a lot of names.
• 17:30
  Actually,
• 17:31
  if you look at that 22 billion,
• 17:32
  the top six or seven names count for close to 80%.
• 17:37
  SPEAKER_01: So it's largely agricultural sector and some project finance.
• 17:41
  SPEAKER_01: Now,
• 17:41
  SPEAKER_01: that project finance is everywhere,
• 17:43
  from people trying to do manufacturing to some level of real
• 17:48
  estate industry.
• 17:50
  But no sectors have been rendered particularly more vulnerable
• 17:54
  by their recent challenges.
• 17:56
  They only get trained because if you're already struggling and
• 18:00
  then rates go up,
• 18:01
  SPEAKER_01: then you get into more trouble.
• 18:03
  SPEAKER_00: With respect to recoveries, because I think one way of looking at
• 18:07
  where your NPLs are concentrated right now is essentially,
• 18:09
  it's a handful of firms.
• 18:11
  But I'm just trying to look at the bigger picture here with
• 18:13
  respect to the judicial
• 18:15
  SPEAKER_00: system that we have in mind,
• 18:16
  SPEAKER_00: because the case backlog there fell marginally in fiscal 22,
• 18:20
  SPEAKER_00: 23,
• 18:20
  SPEAKER_00: down around 2.2%,
• 18:21
  SPEAKER_00: but it's still pretty high.
• 18:24
  SPEAKER_00: 650,000 cases that are still pending somewhere in our legal system.
• 18:27
  SPEAKER_00: So between that backlog and how slow our judicial processes are,
• 18:31
  SPEAKER_00: how are you adjusting your recovery process as a bank?
• 18:36
  SPEAKER_01: You're right.
• 18:36
  SPEAKER_01: Actually,
• 18:37
  the most painful way to resolve any customer relationship that
• 18:42
  goes sour is to try
• 18:43
  SPEAKER_01: to get through the cops for multiple reasons,
• 18:45
  SPEAKER_01: for part of the statistics that you've spoken to,
• 18:49
  SPEAKER_01: but also the technical legal arguments.
• 18:52
  SPEAKER_01: You get stuck into pretty perfunctory legal jargon,
• 18:55
  SPEAKER_01: which doesn't help the customer,
• 18:56
  SPEAKER_01: doesn't help the bank.
• 18:58
  So we try as much as possible to reach out-of-court
• 19:03
  arrangements that are both
• 19:05
  SPEAKER_01: accommodative of our interests and the interests of the customer.
• 19:09
  SPEAKER_01: I would say there are three types of non-performing customer classes.
• 19:14
  SPEAKER_01: The first is I started a genuine business.
• 19:17
  SPEAKER_01: I thought I had a viable business.
• 19:19
  SPEAKER_01: It doesn't work out or something doesn't just work out.
• 19:22
  Such customers are very amenable to wanting to sit around the table,
• 19:27
  agree how to resolve.
• 19:28
  SPEAKER_01: Out of court is usually easier for them.
• 19:30
  SPEAKER_01: So that's the first time.
• 19:32
  The second bunch is the customers will borrow and then
• 19:35
  something suddenly happens
• 19:36
  and it impacts either market times or they get into trouble
• 19:41
  with regulators,
• 19:41
  SPEAKER_01: whatever happens.
• 19:42
  SPEAKER_01: Again,
• 19:43
  that's another branch that is easy because we can see the
• 19:46
  assumptions that they
• 19:47
  SPEAKER_01: made don't hold where they can see it.
• 19:50
  SPEAKER_01: And there's some genuineness in the engagement.
• 19:52
  There's a five branch of customers who borrow with the
• 19:55
  intention of never repay.
• 19:57
  SPEAKER_01: And those people are real and they exist and they're out there.
• 19:59
  SPEAKER_01: And those are happy to dance around with the bank.
• 20:03
  SPEAKER_01: for 10 years, for 15 years, whatever amount of time.
• 20:06
  SPEAKER_01: And those are the ones where out-of-court settlement are difficult.
• 20:09
  SPEAKER_01: And quite honestly,
• 20:10
  SPEAKER_01: if you look at bank balance sheets,
• 20:12
  those are the ones that will stay the longest and keep the NPL
• 20:15
  ratios quite high.
• 20:16
  SPEAKER_01: We try and avoid that through how we onboard,
• 20:19
  SPEAKER_01: character verification,
• 20:21
  SPEAKER_01: where we are engaging customers.
• 20:23
  SPEAKER_01: But you'll always get one or two that keep that drop.
• 20:26
  SPEAKER_00: I want to get back to the rates transmission question,
• 20:28
  SPEAKER_00: because I know we covered it briefly in passing a little earlier.
• 20:30
  And the speed and efficiency of rate transmission decisions has
• 20:33
  always been a big concern,
• 20:34
  SPEAKER_00: right,
• 20:35
  SPEAKER_00: in this market.
• 20:35
  SPEAKER_00: When central bank raises rates, transmission happens relatively quickly.
• 20:39
  SPEAKER_00: When cuts happen,
• 20:41
  the complaints that we often hear and see in the market and the
• 20:43
  data boxes up is
• 20:44
  SPEAKER_00: the transmission of those cuts,
• 20:46
  SPEAKER_00: or more often than not,
• 20:47
  SPEAKER_00: tends to be relatively slow.
• 20:48
  SPEAKER_00: And one of the interesting conversations that
• 20:50
  At the release of results yesterday was this ongoing talk
• 20:53
  around changing the
• 20:54
  SPEAKER_00: architecture for risk-based pricing,
• 20:56
  including perhaps moving towards a secured overnight rate
• 21:01
  lending style arrangement.
• 21:02
  SPEAKER_00: For some of the older listeners on this space,
• 21:04
  SPEAKER_00: they'll remember about 10,
• 21:06
  SPEAKER_00: 11 years ago,
• 21:06
  SPEAKER_00: we had something called KBRR.
• 21:08
  SPEAKER_00: The Kenya Bank reference rate.
• 21:09
  SPEAKER_00: In fact,
• 21:10
  SPEAKER_00: if you actually go to the central bank's website,
• 21:11
  SPEAKER_00: you probably still find some of that legacy data over there.
• 21:14
  SPEAKER_00: And that was essentially an average of CBR and the 91 day T-bill rate.
• 21:19
  And the idea was that we'd essentially use that as sort of
• 21:21
  reference rate for
• 21:22
  SPEAKER_00: pricing loans and so on and so forth.
• 21:24
  What would a new potential arrangement have to do in order to
• 21:28
  avoid the same
• 21:29
  SPEAKER_00: pitfalls that KBR are?
• 21:31
  SPEAKER_01: Rama, this is a touchy one.
• 21:32
  SPEAKER_01: I hope I don't get into trouble.
• 21:34
  SPEAKER_01: We had KBRR between mid-2014 and I think September 2016.
• 21:41
  SPEAKER_01: And you're right, it was a balance between the CBR...
• 21:45
  I think 50% were CBR and 50% was tracking the T-bell to just
• 21:50
  transmit a policy.
• 21:51
  SPEAKER_01: Why did it not do too well?
• 21:54
  If you have a CBR that doesn't quite track the interbank or
• 21:57
  doesn't for whatever reason,
• 21:59
  SPEAKER_01: either because of liquidation,
• 22:00
  SPEAKER_01: liquidity pressure,
• 22:01
  SPEAKER_01: because of effects,
• 22:02
  SPEAKER_01: impact,
• 22:03
  SPEAKER_01: whatever reason,
• 22:04
  then it becomes very difficult because you're trading with
• 22:07
  customers in one
• 22:09
  SPEAKER_01: corridor and your engagement in the market,
• 22:12
  SPEAKER_01: which is the most liquid and moves a lot of money on another corridor.
• 22:16
  SPEAKER_01: So it becomes very difficult.
• 22:18
  SPEAKER_01: And then we had interest rate caps,
• 22:20
  SPEAKER_01: which had their own negative challenges or negative impact,
• 22:24
  SPEAKER_01: particularly exclusion of customers from the credit market,
• 22:29
  SPEAKER_01: because as we've said before,
• 22:30
  SPEAKER_01: there's a price for everyone.
• 22:32
  And therefore,
• 22:32
  if you'll cap the rates,
• 22:34
  then you naturally exclude some people.
• 22:37
  SPEAKER_01: That was 2016 to 2019.
• 22:38
  SPEAKER_01: Then from 2019 onwards,
• 22:42
  SPEAKER_01: we are on some form of an internal pricing stroke,
• 22:45
  SPEAKER_01: the risk-wise pricing that is approved by the regulator.
• 22:49
  SPEAKER_01: A lot of those models,
• 22:50
  SPEAKER_01: particularly our model,
• 22:51
  SPEAKER_01: which you can authoritatively speak to,
• 22:53
  SPEAKER_01: is a cost-plus model,
• 22:54
  SPEAKER_01: which is a build-up of how we run the enterprise,
• 22:58
  SPEAKER_01: the K-Shift DC.
• 22:59
  SPEAKER_01: Again,
• 23:00
  SPEAKER_01: that has had its positive effect,
• 23:02
  but also been challenged in terms of its ability to face the
• 23:06
  market it transmits.
• 23:08
  SPEAKER_01: So effectively, the story there is every model has weaknesses.
• 23:12
  And what you can do is then learn from what you've seen in the
• 23:16
  model and try and
• 23:18
  SPEAKER_01: adjust the sales for the next one.
• 23:21
  SPEAKER_01: Where do I see an opportunity?
• 23:23
  SPEAKER_01: If we were to get back to a reference point,
• 23:27
  is to get to a reference point that is uniform for pretty much
• 23:31
  all the banks.
• 23:32
  What's the difference between KBRR at the time and a uniform
• 23:35
  reference date today?
• 23:37
  SPEAKER_01: I think today,
• 23:38
  SPEAKER_01: given the fact that the Intrax,
• 23:41
  SPEAKER_01: the CBR,
• 23:42
  SPEAKER_01: plus or minus 150 basis points,
• 23:45
  SPEAKER_01: initially 250,
• 23:45
  SPEAKER_01: but now 150.
• 23:48
  SPEAKER_01: There's some form of predictability as to how the CBR is tracking,
• 23:53
  SPEAKER_01: which was not there in the KBRR days.
• 23:56
  SPEAKER_01: So hopefully that does help.
• 23:58
  But the other thing that needs to be considered is the
• 24:01
  idiosyncrasy of COVID-19.
• 24:03
  SPEAKER_01: in banks.
• 24:04
  SPEAKER_01: Of course,
• 24:04
  SPEAKER_01: different banks are running different portfolios with different quality,
• 24:09
  SPEAKER_01: different customer profiles in TCTC.
• 24:12
  SPEAKER_01: So if we're able to balance first,
• 24:14
  how do we ensure that the base rate has some form of
• 24:17
  referencing to the market,
• 24:18
  SPEAKER_01: especially now that there's a lot more predictability?
• 24:20
  SPEAKER_01: And then two, allow a factor which compares or contrasts
• 24:26
  SPEAKER_01: bank A from bank B based on the customer profile,
• 24:30
  SPEAKER_01: based on investment in efficiency,
• 24:32
  SPEAKER_01: CTC,
• 24:33
  SPEAKER_01: and then still maintain the principles around transparency.
• 24:36
  SPEAKER_01: These prices have to be disclosed to the customers.
• 24:38
  Customers have to be able to choose between bank A to bank B
• 24:42
  based on transparent
• 24:43
  SPEAKER_01: information and not something in dim light.
• 24:46
  I think that way we learn from the three phases of models we've
• 24:49
  gone through and
• 24:50
  play our part in driving credit transparency and availability
• 24:54
  in the market.
• 24:55
  SPEAKER_00: Might we end up in a situation where we have a sort of two-speed market?
• 24:59
  SPEAKER_00: Granted,
• 24:59
  SPEAKER_00: that's a slightly crude you're putting,
• 25:00
  SPEAKER_00: because if I look at where customer deposits are,
• 25:03
  SPEAKER_00: where the concentration of the loan begins,
• 25:05
  SPEAKER_00: it's basically the top eight banks in the country,
• 25:08
  SPEAKER_00: right?
• 25:08
  So might we end up in a scenario here where it makes more sense
• 25:12
  to move with a sort
• 25:14
  of secured overnight finance rate approach to pricing loans for
• 25:18
  those tier ones?
• 25:20
  SPEAKER_00: and then risk pricing models of various sorts over a specific timeframe,
• 25:24
  SPEAKER_00: two years,
• 25:25
  SPEAKER_00: three years of adaptation for the remainder of the market?
• 25:28
  SPEAKER_01: I would not segment the market that way.
• 25:31
  SPEAKER_01: I would,
• 25:32
  SPEAKER_01: however,
• 25:33
  SPEAKER_01: allow the customer in whatever bank they are in to make that choice,
• 25:37
  SPEAKER_01: to say you can choose reference rate.
• 25:39
  SPEAKER_01: Let's call it a reference rate.
• 25:41
  SPEAKER_01: You can use a reference rate or allow the customer to make reference
• 25:47
  SPEAKER_01: reference to a market rate or a TBN it is.
• 25:50
  SPEAKER_01: Today,
• 25:51
  SPEAKER_01: as we speak,
• 25:52
  SPEAKER_01: despite most banks,
• 25:53
  SPEAKER_01: including ourselves again,
• 25:55
  SPEAKER_01: having a risk-based pricing,
• 25:57
  our models still allow for when a customer has to be priced off
• 26:02
  a market of
• 26:03
  SPEAKER_01: observable rates.
• 26:04
  SPEAKER_01: 91 T-bill, 182 T-bill with specific reset date.
• 26:09
  SPEAKER_01: That is allowed.
• 26:09
  SPEAKER_01: And in fact,
• 26:10
  SPEAKER_01: in some of our segments,
• 26:12
  SPEAKER_01: especially for our corporate customers,
• 26:14
  100% of our customers in the corporate banking area are on
• 26:17
  T-bill because they have
• 26:19
  SPEAKER_01: treasuries as good,
• 26:21
  SPEAKER_01: even if not better than the banks.
• 26:23
  SPEAKER_01: They're watching the market.
• 26:24
  They're making decisions based on which currency they want to
• 26:27
  borrow in and why,
• 26:29
  whether there is an arbitrage between the currencies and
• 26:31
  therefore they want a marketer.
• 26:33
  SPEAKER_01: So I wouldn't segment the market into big banks,
• 26:36
  SPEAKER_01: whether it be other banks and have different reference rates.
• 26:40
  SPEAKER_01: It would be have one reference rate,
• 26:42
  but allow the customer to choose between one reference rate or
• 26:45
  a market-facing
• 26:46
  SPEAKER_01: reference rate.
• 26:47
  I want to go back to the loan book because I know the bank now
• 26:49
  has exposure as well
• 26:51
  SPEAKER_00: to the G2G oil import arrangement.
• 26:53
  SPEAKER_00: A big chunk of it obviously lies with
• 26:54
  SPEAKER_00: your competitor.
• 26:55
  But in going back to the reference that I made a little earlier
• 26:57
  to the consumption
• 26:59
  SPEAKER_00: patterns that we're seeing in the market for diesel,
• 27:01
  SPEAKER_00: petrol,
• 27:02
  SPEAKER_00: for kerosene,
• 27:02
  SPEAKER_00: and so on and so forth,
• 27:03
  SPEAKER_00: we've seen actual imported volumes being under the contracted amounts.
• 27:07
  SPEAKER_00: And IMF, in fact, pointed out this in November last year.
• 27:10
  SPEAKER_00: What contingent risks are you concerned about,
• 27:13
  SPEAKER_00: if any,
• 27:14
  SPEAKER_00: with your exposure to the GTG arrangement?
• 27:17
  SPEAKER_01: The size of the market is an extraneous act which we pay attention to,
• 27:22
  but our job is actually to try and bake more cake as opposed to
• 27:27
  assuming the cake
• 27:28
  SPEAKER_01: is finite.
• 27:29
  SPEAKER_01: So the view on the way we think about this in the banking
• 27:33
  SPEAKER_01: is okay, there is G2G, but that's not all the trade that there is.
• 27:37
  SPEAKER_01: There is expanding trade in agriculture,
• 27:39
  SPEAKER_01: there is expanding trade in manufacturing and other sectors.
• 27:44
  SPEAKER_01: Particularly,
• 27:44
  SPEAKER_01: there is expanding trade between East African countries,
• 27:49
  SPEAKER_01: save for the intermittent challenges we have with regional conflicts.
• 27:53
  More and more of players in this market are interacting and
• 27:58
  selling in the market.
• 27:59
  SPEAKER_01: So actually,
• 28:00
  SPEAKER_01: the strategic question that we ask ourselves in the bank is to say,
• 28:04
  SPEAKER_01: how much trade are we doing outside of G2G?
• 28:07
  SPEAKER_01: Because that's just one market.
• 28:09
  SPEAKER_01: And then in addition to that,
• 28:10
  SPEAKER_01: because the oil sector is still very material,
• 28:13
  SPEAKER_01: how much do we need to gain?
• 28:15
  SPEAKER_01: So to answer your question directly,
• 28:17
  diversification of how we think about trade amongst or
• 28:21
  alongside very many other
• 28:22
  SPEAKER_01: vectors of our business,
• 28:24
  SPEAKER_01: which continue trade.
• 28:25
  SPEAKER_00: Just want to be more detailed on that, because...
• 28:27
  SPEAKER_00: How exactly does this work?
• 28:29
  SPEAKER_00: Because I'm trying to figure out if there's any exposure,
• 28:31
  SPEAKER_00: any risk,
• 28:32
  SPEAKER_00: essentially,
• 28:32
  SPEAKER_00: that the bank is running in this process.
• 28:34
  SPEAKER_00: Because essentially,
• 28:35
  SPEAKER_00: it's accumulation of shillings,
• 28:36
  some of which gets recycled into treasury bills with a view to settlement.
• 28:40
  SPEAKER_00: I believe it's over, what, 90 or 120 days of payment.
• 28:44
  SPEAKER_00: The number that we saw from the presentation was about 100 million plus.
• 28:47
  SPEAKER_00: Is that growing?
• 28:48
  Is there any risk arising from the fact that you have this cash
• 28:51
  sitting essentially
• 28:52
  on the books and it has to essentially get recycled into US
• 28:55
  dollars for settlement
• 28:57
  SPEAKER_00: at some point in the future,
• 28:58
  SPEAKER_00: probably three or four months down the line?
• 29:00
  SPEAKER_00: Rama, clarify the 100 million?
• 29:02
  I'm trying to remember where that was from because it should
• 29:04
  have been from the
• 29:04
  presentation that was done yesterday when the results were
• 29:08
  being released.
• 29:10
  SPEAKER_00: I'm trying to see if I can find it.
• 29:12
  SPEAKER_01: So I don't remember that number particularly,
• 29:14
  but I get the gist of your question to say you've got quite a
• 29:17
  bit of your balance
• 29:18
  SPEAKER_01: that accumulates and unwinds over a period of time.
• 29:22
  SPEAKER_01: I think it's about 80 days.
• 29:25
  SPEAKER_01: Goes back.
• 29:26
  SPEAKER_01: That arrangement for us and actually for the competition.
• 29:29
  SPEAKER_01: If I answer that question with another question is to say,
• 29:32
  why would banks that are participating in the OTS arrangement
• 29:37
  still be facing
• 29:39
  SPEAKER_01: liquidity pressures?
• 29:40
  SPEAKER_01: So why would banks that are dominant in this area,
• 29:45
  SPEAKER_01: and there's quite a number of them,
• 29:47
  SPEAKER_01: still be showing significant increases in interest expense?
• 29:51
  The answer can only be that the liquidity coming out of that
• 29:54
  area or out of that business
• 29:56
  is ring-fenced to certain investments,
• 29:58
  which is what you alluded to in TBL.
• 30:00
  So it's ring-fenced in terms of how you manage that particular
• 30:03
  balance sheet.
• 30:04
  SPEAKER_01: It comes in,
• 30:05
  SPEAKER_01: you pack it in a certain way,
• 30:07
  SPEAKER_01: you manage your current risk,
• 30:09
  SPEAKER_01: your margin risk,
• 30:10
  SPEAKER_01: and at the end of it,
• 30:11
  SPEAKER_01: you unwind the LC and serve the market.
• 30:13
  SPEAKER_01: That doesn't impact
• 30:15
  SPEAKER_01: your ability to continue serving your customers in agriculture,
• 30:18
  SPEAKER_01: in manufacturing,
• 30:19
  SPEAKER_01: and in the East Africa corridor,
• 30:21
  because you still have your liability raising mechanisms to
• 30:25
  serve on and off
• 30:26
  SPEAKER_01: balance sheet demand,
• 30:28
  SPEAKER_01: the rest of the trade.
• 30:29
  SPEAKER_01: I do hope that's where you are.
• 30:31
  And I actually just found the relevant number in the slide
• 30:33
  because what you said was,
• 30:35
  SPEAKER_00: I think this was a section actually just before your presentation.
• 30:38
  SPEAKER_00: Energy sector support oil importation, $170 million loan exposure.
• 30:43
  SPEAKER_00: So that's the number I had in mind.
• 30:45
  SPEAKER_01: I see.
• 30:45
  SPEAKER_01: I see.
• 30:45
  SPEAKER_01: Because it's
• 30:46
  G2G,
• 30:47
  given the opacity that we have around the nature of the contracts,
• 30:51
  how is it settled?
• 30:52
  SPEAKER_00: Who's bearing the currency risk?
• 30:54
  SPEAKER_00: As an investor,
• 30:54
  there's always a question around the state is not exactly
• 30:56
  saying how this works in
• 30:57
  detail because we can't see the documents and make the judgment ourselves.
• 31:01
  SPEAKER_00: Therefore,
• 31:01
  SPEAKER_00: when we hear that banks have gotten into this space,
• 31:03
  SPEAKER_00: we're like,
• 31:05
  SPEAKER_00: what's your exposure?
• 31:05
  SPEAKER_00: How are you managing this risk?
• 31:07
  SPEAKER_01: So it's quite ring-fenced.
• 31:09
  SPEAKER_01: So the biggest,
• 31:10
  if you're asking this question from a commercial arrangement
• 31:13
  and from a risk
• 31:15
  SPEAKER_01: management perspective,
• 31:16
  SPEAKER_01: so two quick points.
• 31:18
  SPEAKER_01: One,
• 31:19
  SPEAKER_01: from a commercial arrangement,
• 31:21
  SPEAKER_01: the economics are pretty much known,
• 31:24
  SPEAKER_01: except for very few variables,
• 31:26
  SPEAKER_01: especially the currency.
• 31:27
  SPEAKER_01: Now with the currency having stabilized, that becomes muted.
• 31:30
  SPEAKER_01: So that's one aspect.
• 31:32
  SPEAKER_01: From a risk management perspective, liquidity risk,
• 31:35
  SPEAKER_01: ability to meet the liquidity demand at the maturity date,
• 31:38
  SPEAKER_01: impact on liquidity ratios and liquidity profile,
• 31:42
  especially for banks with a bigger balance sheet watches
• 31:45
  because the cycles are short.
• 31:47
  SPEAKER_01: It's not that material because you ring fence it,
• 31:49
  SPEAKER_01: you pack it in certain instruments and you manage it through the cycle.
• 31:54
  Unfortunately,
• 31:54
  I can't share the specific numbers,
• 31:56
  but that's how it works.
• 31:57
  SPEAKER_00: Agriculture, 9% of the loan book is in the agriculture space.
• 32:00
  And we've seen some interesting developments in that space,
• 32:03
  especially over the last year.
• 32:04
  Coffee prices sitting record high,
• 32:06
  smashing records of a asset in the 70s.
• 32:09
  SPEAKER_00: TX port volumes up 20% in the first 10 months of the year.
• 32:12
  What's the outlook you have at the moment for those two
• 32:15
  commodities based on the
• 32:16
  SPEAKER_00: conversations you have with clients there?
• 32:18
  And how will that then translate into what we see in interest
• 32:21
  income and NPLs?
• 32:23
  SPEAKER_01: That's one of our areas of fortune,
• 32:26
  and it just follows because Steinbeer has been here for many
• 32:29
  years and has been a
• 32:31
  SPEAKER_01: leader in industries or sectors that drive the country's growth.
• 32:36
  SPEAKER_01: Now,
• 32:37
  SPEAKER_01: agriculture is 22%,
• 32:40
  SPEAKER_01: 23%,
• 32:48
  24% contributor to our GDP,
• 32:42
  SPEAKER_01: particularly because of what it does to the masters in tea,
• 32:47
  SPEAKER_01: in coffee,
• 32:48
  SPEAKER_01: and all those areas.
• 32:49
  SPEAKER_01: So it's an area that we are deeply entrenched in.
• 32:52
  SPEAKER_01: I don't have the latest statistic now,
• 32:54
  but more than 80% the last time I checked of the tea trading
• 32:58
  that happens at the
• 32:59
  SPEAKER_01: auction in Mombasa goes through a standard platform.
• 33:02
  SPEAKER_01: And we're expanding our kind of services to those customers.
• 33:07
  SPEAKER_01: So do we expect an update out of this?
• 33:09
  SPEAKER_01: Absolutely.
• 33:10
  SPEAKER_01: Are we looking forward to it?
• 33:11
  SPEAKER_01: Absolutely.
• 33:12
  SPEAKER_01: Are we having conversations with clients?
• 33:14
  SPEAKER_01: to ensure that we continue driving that growth?
• 33:17
  SPEAKER_01: Absolutely.
• 33:18
  SPEAKER_01: Do we want to continue doing that business?
• 33:21
  It's inevitable because that's where the biggest part of the
• 33:25
  economy is being driven,
• 33:26
  SPEAKER_01: either directly or indirectly.
• 33:28
  SPEAKER_01: Does that reduce our appetite for the other?
• 33:30
  SPEAKER_01: Not necessarily, but yes, we do expect to
• 33:33
  SPEAKER_01: continue growing in agriculture and doing a lot more.
• 33:36
  SPEAKER_01: I've just mentioned tea, but we do quite a bit of coffee.
• 33:39
  We are getting into local societies and supporting them with
• 33:44
  last mile credits.
• 33:45
  So there's a lot more that we are doing there and we'd like to
• 33:48
  continue doing.
• 33:49
  SPEAKER_00: Just out of interest,
• 33:49
  SPEAKER_00: how sensitive are these revenues from those two commodities,
• 33:53
  SPEAKER_00: coffee and tea,
• 33:54
  SPEAKER_00: from the data that you see to climatic effects?
• 33:57
  SPEAKER_00: We go through this crazy drought, for example, like what we had in 2022.
• 34:00
  SPEAKER_00: Worst drought in 40 years.
• 34:03
  SPEAKER_00: Crop production gets absolutely savaged across the board.
• 34:05
  SPEAKER_00: And it does seem now that those cycles between tons and tons of rain...
• 34:10
  SPEAKER_00: Having a really sharp drought,
• 34:11
  SPEAKER_00: those cycles are getting much,
• 34:12
  SPEAKER_00: much shorter,
• 34:13
  SPEAKER_00: much more compressed.
• 34:14
  SPEAKER_00: By extension,
• 34:15
  doesn't that make the yields you get from clients in that space
• 34:18
  also relatively volatile?
• 34:20
  SPEAKER_01: Those sectors are particularly impacted by three factors.
• 34:24
  SPEAKER_01: One is the one you've mentioned.
• 34:26
  SPEAKER_01: Climatic conditions changes to CETC does have an impact.
• 34:31
  SPEAKER_01: Usually it neutralizes.
• 34:32
  SPEAKER_01: So when there's drought,
• 34:33
  supply goes down and there's a compensation from the price
• 34:36
  movement and the reverse happens.
• 34:38
  SPEAKER_01: So that kind of flattens through the cycle.
• 34:40
  SPEAKER_01: The second is the exchange rate,
• 34:42
  SPEAKER_01: actually,
• 34:43
  SPEAKER_01: which impacts the earnings that are coming to declare in those sectors.
• 34:47
  And the third one,
• 34:48
  believe you me,
• 34:49
  which has a massive impact,
• 34:50
  is dollar availability.
• 34:52
  So in 2023,
• 34:53
  when Egypt and Pakistan,
• 34:56
  those are big consumers who are going to
• 35:00
  a dollar liquidity challenge,
• 35:03
  we could see the impact on the earnings from those customers.
• 35:06
  SPEAKER_01: But I guess,
• 35:07
  SPEAKER_01: Rama,
• 35:07
  the big question or the big comment and what I've learned in
• 35:11
  this banking area is
• 35:13
  that you really have to be able to stay the course with those
• 35:16
  customers because
• 35:17
  SPEAKER_01: nothing has changed in the fundamental level.
• 35:20
  coffee exporter or tea exporter when Pakistan doesn't have
• 35:23
  dollars or doesn't have
• 35:25
  SPEAKER_01: access to dollars.
• 35:25
  SPEAKER_01: So it's how you manage the relationship.
• 35:28
  SPEAKER_01: It's how you help the client through the cycles.
• 35:31
  And I'm glad that there's none actually of our customers in
• 35:34
  those areas that has
• 35:35
  SPEAKER_01: given us lots of trouble.
• 35:37
  SPEAKER_01: So seasonal, but manageable.
• 35:39
  SPEAKER_00: Going into detail on that,
• 35:40
  the dollar shortages problems that you mentioned with respect
• 35:42
  to Egypt and Pakistan,
• 35:44
  SPEAKER_00: we covered it speaking from my perspective on the news desk at CGTN.
• 35:48
  SPEAKER_00: And it was a whole other story.
• 35:50
  SPEAKER_00: It was intense for companies operating in Egypt and in Pakistan.
• 35:54
  SPEAKER_00: I wonder,
• 35:55
  SPEAKER_00: because if I'm a tea farmer,
• 35:56
  SPEAKER_00: like the SACOS,
• 35:57
  SPEAKER_00: for example,
• 35:57
  SPEAKER_00: that you say you're dealing with,
• 35:58
  SPEAKER_00: I've sold my tea at auction in Mombasa.
• 36:01
  SPEAKER_00: I'm expecting payment.
• 36:02
  And Egypt and Pakistan are among the top five buyers of our
• 36:05
  commodity today.
• 36:06
  SPEAKER_00: And they turn around and say,
• 36:07
  SPEAKER_00: you guys,
• 36:07
  SPEAKER_00: we don't exactly have the dollars that we need right now.
• 36:10
  SPEAKER_00: How do you manage that FX risk?
• 36:11
  SPEAKER_00: Do you take on it as a bank?
• 36:13
  SPEAKER_00: How do you manage it?
• 36:14
  SPEAKER_01: That's where the business secret is, Rama.
• 36:16
  SPEAKER_01: You're asking too much.
• 36:17
  SPEAKER_01: But we study these cycles for long periods.
• 36:23
  SPEAKER_01: And in our business cash flow modeling,
• 36:26
  we do stress some of those facts and test the limits of those
• 36:30
  stresses on the customers.
• 36:32
  SPEAKER_01: And yes,
• 36:33
  some of them you cannot predict because we didn't see the
• 36:36
  squeeze on liquidity,
• 36:38
  SPEAKER_01: availability,
• 36:38
  SPEAKER_01: small cost markets as much as we did.
• 36:41
  SPEAKER_01: But it's really what I've learned,
• 36:43
  SPEAKER_01: Rama,
• 36:43
  SPEAKER_01: it's the long-term relationship that you have with those customers,
• 36:46
  SPEAKER_01: your ability to accommodate them within reason.
• 36:50
  SPEAKER_01: Who sits with FX risk?
• 36:51
  Definitely the customer sits with FX risk to the extent that it
• 36:54
  is an open exposure with them.
• 36:56
  SPEAKER_01: How do you ensure that that does not hurt them?
• 36:59
  SPEAKER_01: Are you the one exchanging the dollars for them?
• 37:01
  SPEAKER_01: Are you in a position to provide replays?
• 37:03
  SPEAKER_01: So to the extent that,
• 37:05
  SPEAKER_01: for example,
• 37:05
  SPEAKER_01: we've got Neptune flows from any other of our sources,
• 37:08
  SPEAKER_01: wild from remittances,
• 37:10
  SPEAKER_01: etc.
• 37:11
  How do we help such customers to see the opportunity to
• 37:14
  translate some of the
• 37:15
  SPEAKER_01: exposures into Kenya Shilings,
• 37:18
  potentially unwind some of those exposures through other
• 37:21
  sources of cash flow?
• 37:23
  SPEAKER_01: So it's the whole dynamic of how you manage a client relationship,
• 37:26
  SPEAKER_01: as opposed to the episodic challenges that they may be going through,
• 37:29
  SPEAKER_01: because you've been banking these people for 30 plus years.
• 37:32
  SPEAKER_00: I've got one last question for you with respect to South Sudan.
• 37:35
  SPEAKER_00: My sense is that as a bank,
• 37:36
  you're fairly optimistic about the resumption of oil exports
• 37:39
  from Africa's youngest
• 37:40
  SPEAKER_00: country this year,
• 37:41
  despite the conflict and the volatility we're seeing with
• 37:44
  Sudan's civil war in
• 37:45
  SPEAKER_00: South Sudan's neighbour to the north.
• 37:46
  Walk us through the base case that informs this optimism that
• 37:49
  we're seeing from Stanbeck.
• 37:51
  SPEAKER_01: If you understand the architecture of the oil exportation in South Sudan,
• 37:56
  SPEAKER_01: It all goes through the port Sudan up in the north.
• 37:59
  SPEAKER_01: There are two major pipelines,
• 38:02
  one that comes from the northeast of the country in South Sudan
• 38:06
  and one that comes
• 38:07
  SPEAKER_01: from the center,
• 38:08
  SPEAKER_01: the north center,
• 38:09
  SPEAKER_01: if ever there was a geographical description like that.
• 38:12
  SPEAKER_01: One transports 30%, the other one transports 70% of the oil.
• 38:17
  Now,
• 38:17
  why was the force majeure declared back in 2023,
• 38:22
  late 2023,
• 38:24
  or early 2024?
• 38:26
  Because there was a big rupture on the pipeline,
• 38:30
  the subline that transmits the 70%.
• 38:34
  SPEAKER_01: And therefore, it had a significant impact.
• 38:37
  More than 95% of the national revenues in South Sudan come from
• 38:41
  this sector.
• 38:42
  SPEAKER_01: So it was an existential risk,
• 38:44
  SPEAKER_01: not only for banks operating there,
• 38:46
  SPEAKER_01: but also even for the country.
• 38:48
  SPEAKER_01: Where is our optimism coming from?
• 38:50
  SPEAKER_01: That rapture has since been repaired.
• 38:53
  SPEAKER_01: The force majeure has been lifted by the government of Sudan.
• 38:57
  SPEAKER_01: There has been some agreement between the RSF and the government,
• 39:02
  SPEAKER_01: and oil is actually being produced now in South Sudan.
• 39:06
  SPEAKER_01: And we do expect the first shipment.
• 39:08
  And we are in direct conversations with our clients who are
• 39:11
  actively involved in this business.
• 39:13
  SPEAKER_01: We are expecting the first shipment in April after,
• 39:16
  SPEAKER_01: of course,
• 39:17
  SPEAKER_01: the pipeline has been cleaned and gone through all the rituals.
• 39:20
  SPEAKER_01: So that is where our optimism comes from, from a baseless perspective.
• 39:24
  There's always a bare case to say that the conflict in Sudan
• 39:27
  has not yet been resolved.
• 39:29
  SPEAKER_01: And if that escalates again,
• 39:31
  SPEAKER_01: it could be the Achilles heel to getting this optimistic stand going.
• 39:37
  SPEAKER_00: It's been an interesting conversation, Dennis.
• 39:39
  I don't think I can thank you enough for taking time out of
• 39:41
  your schedule to have
• 39:42
  SPEAKER_00: this conversation,
• 39:43
  SPEAKER_00: not just with us,
• 39:43
  but also to all the people who have been listening quite
• 39:45
  patiently for the last
• 39:47
  SPEAKER_00: hour or thereabouts.
• 39:48
  SPEAKER_00: We'll bring this space to a close at the moment.
• 39:50
  SPEAKER_00: We've been speaking to Dennis Musau,
• 39:52
  SPEAKER_00: Chief Financial and Value Officer at Stanbik Bank,
• 39:55
  SPEAKER_00: going through some of the key issues in the results for
• 39:58
  SPEAKER_00: the calendar year 2024,
• 39:59
  SPEAKER_00: and of course,
• 39:59
  the wider macroeconomic issues that essentially inform the
• 40:02
  numbers that we saw from
• 40:04
  SPEAKER_00: that particular bank.
• 40:05
  SPEAKER_00: The market certainly seems to like the results that came out yesterday.
• 40:08
  SPEAKER_00: The shares closed up by around 6% plus higher.
• 40:11
  SPEAKER_00: They also were fairly positive just before I came online for this space.
• 40:15
  SPEAKER_00: So hopefully,
• 40:15
  it seems like the market actually likes the numbers that we saw
• 40:18
  coming out from Stanbeck.
• 40:19
  And over the long run,
• 40:20
  we'll see what the market's judgment does look like.
• 40:23
  SPEAKER_00: Denis Santisana for your time, and of course, to all of you who've been
• 40:26
  SPEAKER_00: here very patiently with us for the last hour.
• 40:28
  SPEAKER_00: Thank you very much.
• 40:29
  SPEAKER_00: Keep it for more content from Mongol Capital.