Banking Sector in Fresh Cost Cutting Venture

Mwaura Kimani

12 June 2011

Nairobi — Kenya’s banks are used to defining the country’s economic weather. The fate of the banking sector has traditionally been linked to consumer confidence.

Its profitability — which arises from more lending — is usually a signal of the state of the economy as it only tells whether manufacturers and households took in more money in credit or not which effectively has an impact on production and level of demand for goods and services.

So when banks raid the executive suites and let go of hundreds of senior, middle-level managers and staff in a space of three months, that sends signals that their executive suites could be piling weight on their operation costs and effectively threatening profitability in a turbulent environment.

Last week, Co-operative Bank, Kenya’s third largest lender by assets, said it would part ways with 34 of its managers in a bid to cut its top-heavy structure. MD Gideon Muriuki said this was meant to achieve a leaner and flatter structure particularly in the management cadre, a feat that should help the bank hit its $119 million profit before tax target for 2011.

KCB, Kenya’s largest bank by assets is currently executing one of the biggest corporate reorganisations in the recent history of the banking sector following recommendations by international consultancy firm McKinsey and Company, to help slash the bank’s operational expenses. The restructuring, announced on May 17 has so far seen 10 senior executives exit the bank as the lender cut its executive committee to seven members from 22 and scrapped the positions of deputy CEO’s, director public affairs and communications, and the divisional director – special projects.

The transformation project is expected to enter the second phase, affecting middle-level managers and will see alignment of functions across the business to support the new structure.

Early this year, Barclays Bank let go of around 200 middle level managers slashing it labour costs which shot to $98.8 million from $85.7 million in 2009. Comparatively, KCB’s wage bill grew 31 per cent last year to stand at 110.7 million from $84.5 million in 2009. Equity Bank too re organised its executive suites, merging some departments and abolishing others.

Focus has shifted to payrolls to reduce the cost to income ratio with most banks aiming for a below 50 per cent level.

“Labour costs constitute up to 60 per cent of the total costs of most banks. With profitability in 2011 under threat, we are likely to see the industry increasingly cutting on staff costs, ” said Richard Etemesi, Standard Chartered Bank’s area general manager for East Africa and chief executive officer for Kenya. “This is coming at a time when there is a demand for salary increase from unions; of up to 30 per cent raises way above the industry’s average 12 per cent upward adjustments. Its unlikely therefore that we will see a significant rise in staff numbers in the remaining part of 2011. The trick will be how to balance expansion, the push for better earnings and sustainable labour costs.”

Kenyan banks were last year struggling to shed off heavy labour costs which continue to threaten their profitability. Statistics from the Central Bank of Kenya, the regulator, indicate the number of new employees in the sector grew more than four times last year to stand at 2,714 pushing total employment in the sector to 28,846. In 2009, total employment stood at 26,132, compared to 25,491 the previous year. Clerical and secretarial staff constitute the biggest chunk of the banking labour force followed by managerial roles.

Banking heads and analysts see more cost cutting measures in the industry in the remaining part of the year, a trend that could also start taking shape in other key sectors of the economy in the wake of a bleak outlook.

“Its not just banks. Companies are looking for competitiveness, how to increase their market share and regional expansion” said Kuria Muchiru, the Senior Partner and Country Leader for Kenya at PricewaterhouseCoopers.

“Everyone wants to be leaner to remain competitive. For banks, focus is on managing the cost-income ratio, ” he added.

While growth more than doubled to 5.6 per cent last year according to the Economic Survey 2011 released last month, surging food and fuel driven inflation and exchange rate volatility have dimmed the outlook for this year. This has sent company executives back to the drawing board for strategies to ring-fence their firms’ 2010 profitability. The World Bank, the IMF and the Ministry of Planning have all cut their economic growth forecasts to not more than 5.4 per cent citing inflationary pressures and heightening political risks ahead of next year’s general election.

The problem of surging operational costs is not specific to the banking sector.

“In the manufacturing sector however, its unlikely that jobs will go. Its usually hard to let go workers here” said Tabitha Karanja, the managing director of Keroche Breweries, Kenya’s second largest brewer.

“If production costs go up sharply hurting sales, we are likely to look to increasing prices of products to cover up for the losses instead of letting go staff, ” she added.

Over the past two years, most regional firms found themselves slashing costs rather than racing to meet targets. Pay and promotion freezes, changes in pension schemes, cuts in recruitment and lower training budgets were prevalent.

However, HR experts said employees interpreted these measures as a breach of trust, making it more difficult for firms to retain key talent.

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