By JAMES ANYANZWA

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Kenya’s top banks have posted impressive profits for 2018, benefiting from the Central Bank’s one-year earnings “protection” window in the implementation of the International Financial Reporting Standard (IFRS 9) which demands higher provisioning for bad loans.

Analysts had predicted that the banks would report nearly flat revenue performance in the face of declining credit to the private sector and growth in non-performing loans.

An analysis of the 2018 financial results of top commercial banks shows that although all the banks maintained profitability, the situation would have been different if the loan-loss provision coverage had taken full effect in January.

The Central Bank of Kenya spared the lenders from charging increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), a move that has seen banks record lower expenses while pushing up profits.

CBK allowed banks to charge their increased loan-loss provisions against the retained earnings in the balance sheet and not in the profit-and-loss account, sparing them a drastic dip in profits.

Industry sources told The East African that this year things are likely to be difficult for the banks as they will have to charge all their increased loan-loss provisions to the profit-and-loss account.

“Last year we had a window to manage our profit and loss account, but that window has closed and therefore this year we have to charge all our loan-loss provisions against our profit-and-loss account,” a banker who did not want to be named said.

Under the IFRS9, which replaced the International Accounting Standard (IAS) 39, banks are expected to provide for projected loan losses rather than those already incurred, thereby reducing their profitability and eroding their capital base.

The CBK gave Kenyan lenders a five-year transition period to shore up their capital bases in compliance with the new accounting standard.

Analysts estimated that the capital bases of the lenders would drop by close to Ksh20 billion ($200 million) when the rules took effect.

The implementation of IFRS 9 is expected to impact the profitability and capital positions of lenders, since banks will have to set aside greater provisions for expected credit losses.

Figures from the Central Bank, show that the volume of bad loans in Kenya’s banking industry increased by Ksh63.8 billion ($638 million) to Ksh298.4 billion ($2.98 billion) in June 2018, from Ksh234.6 billion ($2.34 billion) in June 2017, largely blamed on delayed payments by government agencies and the private sector, business stagnation and a slow uptake of housing in the real estate sector.

But the banks reduced the loan loss provisioning by 25 per cent to Ksh12 billion ($120 million) in June 2018, from Ksh16 billion ($160 million) in June 2017, thereby boosting profitability by 9.8 per cent to Ksh76.2 billion ($762 million) from Ksh69.4 billion ($694 million).

A review of the top banks’ financial statements shows significant reduction in loan loss provisions in the income statements, with weakening performance of various revenue streams as a result of controlled lending rates and low economic activities.

According to the reports KCB, the largest lender by assets, posted a 22 per cent growth in net profit to Ksh24 billion ($240 million), from Ksh19.7 billion ($197 million) in 2017.

The lender reduced its loan loss provision by more than half to Ksh2.9 billion ($29 million), from Ksh5.9 billion ($59 million), and excluded a one-off restructuring cost of Ksh2 billion.

Its revenue performance remained flat at Ksh23 billion ($230 million) as a result of a decline in foreign exchange income and on fees and commissions charged on banking transactions.

“Looking ahead, we expect our performance in 2019 to be driven by renewed investor confidence and a rebound in the East African economy,” said KCB Group chief executive Joshua Oigara.

Co-operative Bank of Kenya reduced its loan loss provision by 49 per cent to Ksh1.84 billion ($18.4 million) from Ksh3.6 billion ($36 million), despite its volume of total NPLs increasing by 41 per cent (Ksh7 billion, $70 million) to Ksh25.2 billion ($252 million) from Ksh17.81 billion ($178.1 million).

Its total operating income rose marginally by five per cent (Ksh2 billion, $20 million) to Ksh43.67 billion ($436.7 million) from Ksh41.59 billion ($415.9 million).

The bank’s net earnings grew by 11 per cent to Ksh12.73 billion ($127.3 million) from Ksh11.4 billion ($114 million), with its South Sudan subsidiary making a loss of Ksh 30.78 million ($307,800) due to hyperinflation occasioned by devaluation of the South Sudanese Pound.

Standard Chartered Bank Kenya reduced its loan loss provisions to Ksh1.93 billion ($19.3 million) from Ksh4.18 billion ($41.8 million), pushing up its profit to Ksh8.09 billion ($80.9 million) from Ksh6.91 billion ($69.1 million).

Its total NPLs increased to Ksh13.87 billion ($138.7 million) from Ksh11.31 billion ($113.1 million) while total operating income increased to Ksh28.59 billion ($285.9 million) from Ksh27.33 billion ($273.3 million).

Diamond Trust Bank’s net earnings rose four per cent to Ksh6.68 billion ($66.8 million) from Ksh6.44 billion ($64.4 million), with loan loss provision declining to Ksh2.98 billion ($29.8 million) from Ksh4.3 billion ($43 million).

Total NPLs and advances fell to Ksh12.14 billion ($121.4 million) from Ksh13.05 billion ($130.5 million).