East African banks weathered a challenging operating environment to post healthy profits during the first six months of this year.

But analysts are painting a grim picture of the second half in the wake of rising interest rates, exchange rate volatility and looming cash shortages in the banking system as central banks mop up excess liquidity to stabilise fluctuating currencies.

Kenya’s Co-operative Bank’ half-year profit jumped 32 per cent to Ksh6.24  billion ($60.78 million)  from Ksh4.7 billion ($45.78 million)  in the same period last year, the highest growth among the top banks in the region, with its subsidiary in  South Sudan crawling out of a loss making territory to  contribute  Ksh122 million ($1.18 million)  to the overall bottom-line.

The profit largely emanated from a reduction in operational costs and an increase in interest income on loans and advances that grew by 22 per cent to Ksh16.68 billion ($162.47 million), up from Ksh13.65 billion ($132.96 million).

Non-interest (fee-based) income fell 4 per cent to Ksh5.97 billion ($58.15 million) from Ksh6.23 billion ($60.68 million).

“We expect a much better performance in the second part of the year but we could see a bit of a slowdown in as far as the loan book is concerned, because of the tight liquidity in the market,” said Gideon Muriuki, Co-op Bank group managing director and chief executive.

The bank’s stock on the Nairobi Securities Exchange rose 0.5 per cent to Ksh19.60 per share upon the release of the results on Wednesday last week.

“Going by the performance of the banks,  the  industry has been  stable  in the first half of this year, but I think in the second half the issue of interest rate and exchange rate volatility will see net interest margins come under pressure,” said Francis Mwangi, head of research at Standard Investment Bank.

Analysts however expect banking stocks to appreciate in the next six months because any uncertainties  revolving around corporate earnings and the strength of the economy  have been managed well, said Mr Mwangi.

The Bank of Kigali (BoK) reported a nine per cent growth in net profit for the six months to June 30, with its net earnings rising to Rwf 10.76 billion ($14.31 million) from Rwf9.84 billion ($13.09 million) in the same period last year.

The bank’s profitability was mainly driven by growth in interest income but net fees and commission income and foreign exchange income declined.

BoK stock on the Rwanda Stock Exchange closed the trading session on Thursday last week at Rwf290 ($0.38)  per share  compared with the previous day’s (Wednesday) Rwf285 ($0.37).

READ: Healthy loan book pushes Bank of Kigali profit to Rwf10.8bn

KCB posted a 13 per cent growth  in net profit  for  the six months to June 30  up from Ksh8.17 billion ($79.58 million) to Ksh9.24 billion ($90 million)  in the same period last year.

The bank’s stock at the NSE is trading at an average of about Ksh48.5 ($0.47) per share.

“In the first six months of 2015, the business operating environment has been somewhat unstable in comparison with last year but we remain optimistic,” said Ngeny Biwott, chairman, KCB.

According to Eric Munywoki, a research analyst at Old Mutual Securities Ltd, the outlook for banks remains positive due to the expected growth in government spending in the second half of the year, but the likely increase in the level of non-performing loans due to high interest rates would dampen their performance.

“There is still value for growth because banks are now leveraging technology and they have a huge appetite for lending to the small and medium-sized enterprises. They will still make money from the high interest rates but the increased provisions for non-performing loans will have an impact on their performance,” said Mr Munywoki.

Equity Bank Group’s net earnings grew 12 per cent to Ksh8.56 billion ($83.38 million) from Ksh7.66 billion ($74.61 million), due to better performance of its regional subsidiaries and revenue diversification programmes.

The group’s net interest income increased  11 per cent   to Ksh15.5 billion ($150.98 million)  from Ksh14.01 billion ($136.46 million) , while the non-funded income grew 30 per cent  to Ksh10.8 billion ($105.2 million)  up from Ksh8.3 billion ($80.84 million).

CfC Stanbic Bank suffered a 42 per cent drop in profits from Ksh3.3 billion ($32.14 million) to Ksh1.96 billion ($19.09 million) due to political instability and lack of cash in the banking system caused by the Central Bank’s move to mop up excess liquidity to halt the slide in the shilling.

READ: South Sudan woes pull CfC Stanbic profits to $19 million

Its share price was trading at Ksh95.50 ($0.93) at the close of trading Thursday last week.

According to Johnson Nderi, manager in-charge of corporate finance and advisory at ABC Capital, the higher rate of interest has increased the net interest margin for banks and boosted their profitability, a factor that may also have a positive impact on listed banking stocks.

Diamond Trust Bank Group, whose stock was trading at Ksh201 ($1.96) per share, reported 11 per cent growth   in profit after tax to Ksh3.25 billion ($31.65 million), from Ksh2.94 billion ($28.63 million) in the same period last year.

The group earned Ksh11.71 billion ($114.06 million) in interest income, up from Ksh9.85 billion ($95.94 million), representing a 19 per cent growth.

Non-interest income from fees and commissions grew 28 per cent to Ksh2.36 billion ($22.98 million) from Ksh1.84 billion ($17.92 million).

Barclays Bank posted 8 per cent growth in its net earnings to Ksh4.55 billion ($44.32 million) from Ksh4.23 billion ($41.2 million) in the same period last year.

Its interest income grew four per cent to Ksh10 billion ($97.4 million) from Ksh9.7 billion($94.48 million)  while non-interest income increased by 12 per cent to Ksh4.78 billion( $46.56 million)  from Ksh4.26  billion ($41.49 million) partly driven by the introduction of charges on ATMs.

Its share price on the NSE dropped 0.34 per cent to Ksh 14.80 ($0.14) on the announcement of the results on Thursday last week.

Unaudited financial statements show that a bulk of the bank’s profit (90 per cent) was generated from the Kenyan operations while South Sudan, Tanzania and Rwanda contributed 6.9 per cent, 1.4 per cent and 1.3 per cent respectively. Uganda accounted for 0.4 per cent while Burundi made no money.