Top East African banks posted double-digit growth in profit in the six months to June 30, signalling a strong recovery from Covid-19 pandemic.
The growth was largely informed by a reduction in loan loss provisions and heavy investment in government securities coupled with increased income from fees and commissions.
However, most lenders are taking a conservative view of the earnings prospects for the full year by withholding interim dividends what with soaring inflation figures, weakening currency, rising fuel prices and the political stalemate over the disputed presidential polls that is awaiting Supreme Court ruling.
“This is a reflection of the strong post-Covid recovery where the loan accounts have started performing and hence reversing from the non-performing loans (NPLs) status,” Habil Olaka, the association’s chief executive told The EastAfrican last week
“In the year 2020, the combination of IFRS 9 and bleak picture of the future due to Covid-19 meant that banks took a very conservative view of the portfolio hence the high NPLs. In 2021 it turned out that due to the measures that the Central Bank facilitated and the restructuring effected by the banking sector to afford the borrowers some breathing space, the outturn was not as bad as was the case in 2020.”
According to Mr Olaka, the trend in the reduction of NPLs in the industry is expected to continue this year.
According to the Central Bank, the banking industry’s capital adequacy ratio declined marginally in the three months to June to 18.8 percent from 18.9 percent in the three months to March 2022 largely due to lower increase in total capital of 1.3 percent as compared to 1.9 percent increase in total risk weighted assets.
The asset quality, measured by gross non-performing loans to gross loans ratio deteriorated to 14.7 percent from 14 percent in the same period due to an 8.6 percent increase in gross NPLs as compared to a 3.3 percent increase in gross loans.
According to CBK, lenders are seeking additional capital injection to accommodate the expected rise in credit losses as a result of the implementation of the IFRS 9 which comes with challenges of its own.
These challenges include lack of uniformity in probability of defaults (IFRS 9 models) across all banks in Kenya, costly model redevelopment with the emergence of new information and the macro-Economic factors brought about by the Covid-19 pandemic which have made it more difficult to compute the probability of default.
A quarterly survey by the CBK shows 44 percent of bank CEOs expect NPLs to fall in the third quarter while 33 percent expect the level of NPLs to rise.