By JAMES ANYANZWA

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Kenyan listed banks have begun taking precaution against the grim earnings prospects triggered by slowdown in economic activities as a result of the high cost of living, which has left most borrowers struggling to repay their loans.

The tough operating environment has manifested itself mostly through a slowdown in earnings for retail banks which depend mostly on individuals and the small and medium-sized enterprises (SMEs) to shore up their non-funded (non-interest) income through increased banking transactions.

For instance, the half year growth in net earnings for Equity and Co-operative banks slowed to a single digit while that of KCB plunged by 20 percent.

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The increased loan loss provisioning, backed by the International Monetary Fund, is treated as an expense in the lenders’ books with an overall downward effect on earnings.

Unaudited financial statements for the 10 banks listed on the Nairobi Securities Exchange (NSE) show a 60.34 percent ($106 million) growth in provisions for bad loans in six months as the lenders attempt to cushion themselves from the deteriorating asset quality.

During the period, about Ksh91.05 billion ($627.93 million) worth of loans turned sour on account of a struggling economy saddled by high inflation, sky-high interest rates, depreciating shilling against the dollar and unrelenting political posturing. By last week the shilling had fallen to a record low of Ksh145 against the dollar.

Most lenders, according to the latest Central Bank survey, expect the level of non-performing loans (NPLs) to rise in the third quarter (July-September) of 2023, with the personal and household, and trade sectors being the hardest hit.

Unaudited financial statements for the 10 banks which are primarily listed on the Nairobi bourse increased their impairment charges on bad loans by 60.34 percent to Ksh40.84 billion ($281.65 million) in six months to June from Ksh25.47 billion ($175.65 million) in the same period last year, while the volume of gross NPLs increased by 20.31 percent to Ksh539.29 billion ($3.71 billion) from Ksh448.23 billion ($3.09 billion) in the same period.

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Signs of recovery

These lenders are Absa, Equity, Co-operative, HF Group, Standard Chartered Bank, Stanbic Bank, Diamond Trust Bank (DTB), KCB, I&M Bank and NCBA. The list excludes the cross-listed Bank of Kigali (BoK).

Last year, most lenders reported double digit growth in net profit figures riding largely on the volatility in the forex market and lower loan loss provisions as the economy showed signs of recovery from the effects of Covid-19.

The IMF termed the Kenyan banking sector resilient in the face of external and domestic shocks but urged banking executives to make adequate and full provision for bad debts under the existing uncertain and volatile operating environment.

“The banking system is sound yet exposed to evolving risks. Banks are well-capitalised and liquid overall, and the authorities should continue to closely monitor risks,” said IMF through its Country Report for Kenya No. 22/382 dated December 2022.

“Resolution of NPLs and continued adequate provisioning should be priorities, while the CBK’s approach to consolidating weaker banks is welcome.”
IMF’s twin recommendations — raising interest rates and increasing provisions — effectively leads to a surge in bank expenses, leading to a squeeze in profit margins.

Economists who spoke to The EastAfrican last month argued that a fresh spike in bad loans in the banking sector will impact profitability, although the lenders could also benefit from other sectors such as the service sector.

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“It would cut both ways. There will be prospects of higher revenue from growth sectors particularly in the service sectors, but there will also be higher risks of default in underperforming ones such as real estate. The net effect will vary from bank to bank depending on the level of exposure to the various sectors,” said Ken Gichinga, chief economist at Mentoria Consulting.

“Higher NPLs must be accompanied by higher provisions.”

Eric Musau, a Director-in-charge of Research at Standard Investment Bank argued that while banks could post expansion in margins the rising cost of funding could offset some of this gain.

“NPLs are a concern but if the government reduces the pending bills this increase may only be moderate,” said Mr Musau.