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NCBA clients shift Sh14bn deposits to higher return investments
NCBA CEO John Gachora (right) with Finance Director David Abwoga at a media briefing to announce half-year financial results in Nairobi on August 24, 2023.
NCBA customers moved Sh14 billion from current and savings accounts to the bank's wealth management fund in the six months to June as they sought higher returns in an environment of rising interest rates.
The shift to fixed deposits and other higher-return investments comes in an environment where banks such as NCBA have raised interest rates on such products to fend off competition from alternative options such as government debt securities.
NCBA chief executive John Gachora said that the search for better returns slowed the growth of demand deposits, which can be withdrawn at any time, and hit the bank with higher interest expenses in the first six months of the year.
The bank’s private wealth management entity, NCBA Wealth, offers portfolios comprising private and public, onshore and offshore debt, equities, commodities and alternative investments.
David Abwoga, NCBA's director of finance, said the shift from demand deposits contributed to the growth in the wealth division’s assets under management to Sh54 billion at the end of June 2024 from Sh42 billion at the end of December 2023. This resulted in a net growth of Sh12 billion in the assets under management.
“We have seen a bit of our deposits move to our wealth management side because our customers are looking for diversification and higher return. So, a bit of that asset under management of Sh54 billion on the wealth management side relates to our deposit base,” said Mr Abwoga.
The trend is in line with Central Bank of Kenya (CBK) data, which showed that demand deposits held by the banking sector fell by Sh54 billion to Sh956 billion at the end of March this year from Sh1.01 trillion at the end of December 2023. The CBK said this was due to increased investment in government securities.
Returns on government paper have been rising, hitting as high as 18 percent. Banks have been forced to react by raising interest rates on deposits to an average of 11.48 percent by the end of June, a level dwarfed only by the 17.85 percent that banks were offering customers in May 1998.
The increased deposit rate has translated into a higher interest income expense. For instance, NCBA interest expense on customer deposits rose 67.2 percent to Sh20.3 billion in the half year ended June 2024, even as deposits rose by 2.3 percent to Sh528.9 billion.
“With the kind of customer base that we have, nobody wants to leave idle money anymore. Everybody, even the government, is coming for depositors. That gives you the context of the shift towards term deposits, fixed deposits and other higher rate earning deposits,” said Mr Abwoga.
NCBA, which is targeting to have 60 percent of customer deposits as demand deposits and reduce its interest expenses, has been expanding its branch network to attract cheap deposits from retail customers.
Cash-rich companies and wealthy individuals are the main source of wholesale deposits, but they demand a sizable return to lock their money for periods ranging from one to 12 months. The bulk of retail deposits earn no interest and can be lucrative for a bank that can keep this funding base stable or growing.
