Shareholders of East Africa’s listed banks are staring at reduced full-year dividends, following a modest performance by most lenders in the nine months to September 30.

Banks in the region recorded a lacklustre third quarter earnings growth and their stocks fell to record lows in a difficult operating environment triggered by depreciation of local currencies, rising interest rates and collapse of some banks.

Market analysts said despite single digit inflation, interest rates in the region have been on an upward trend, pushed by the tight monetary policies adopted by regional central banks to shore up local currencies.

“As a result of the US dollar strengthening against virtually all currencies, East African currencies have fallen significantly in value year to date,” said Teddy Pole, an investment analyst at AIB Capital.

“The Ugandan shilling has suffered the most, losing 31 per cent against the US dollar as at October 21, compared with 28 per cent  for the Tanzanian shilling, 13 per cent for the Kenyan shillings and 6 per cent  for the Rwandan franc,” he added.

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However, despite significant losses in currency value, import cover in these countries remains strong, averaging four months of imports, according to the latest “Financial Sector Market Report” released by AIB Capital Ltd.

A  review of the performance of  10 listed banks in Kenya, eight in Uganda’s and, one each in Rwanda and Tanzania showed that the lenders’ net earnings for nine months to September 30 grew by an average of five per cent to $585.42 million from $557.38 million over the same period last year.

The growth in revenues was boosted by high interest rates charged on loans and advances.

The banks include CRDB of Tanzania, whose net profit grew to Tsh38.75 billion ($17.48 million) from Tsh31.25 billion ($14.16 million), with interest income surging to Tsh127.2 billion($57.67 million)  from Tsh98.23 billion ($44.53 million).

Bank of Kigali posted a 19.35 per cent growth in net earnings from $6.2 million to $7.4 million, as interest income jumped 16 per cent to $21.8 million from $18.8 million.

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Kenya Commercial Bank’s profit after tax went up to Ksh13.57 billion ($130.41 million) from Ksh12.38 billion ($118.98 million) while Equity Bank’s net profit grew to Ksh12.81 billion ($123.11million) from Ksh11.21 billion ($107.73 million).

During the same period, Co-operative Bank’s profit after tax grew to Ksh8.62 billion ($82.84 million), while Barclays Bank of Kenya posted a 2.72 per cent growth to Ksh6.4 billion ($61.5 million).

I&M Bank and NIC Bank recorded 11.39 per cent and 7.8 per cent growth in net earnings to Ksh4.37 billion ($41.99 million) and Ksh3.59 billion ($34.5 million) respectively.

However, Standard Chartered Bank Kenya and CfC Stanbic bank faced a reduction in profitability with their net earnings dropping 24 per cent and 36 per cent  to Ksh6.22 billion ($59.77 million) and Ksh2.75 billion($26.42 million) respectively.

“The majority of banks are seeing slowed growth and one of the key reasons is how the economy is performing. We are expecting profits to slow down at the end of the year and the banking stocks to be more volatile,” said Daniel Kuyoh, senior investment analyst at Alpha Africa Asset Managers.

“We have already started seeing many companies issue profit warnings and going forward we expect to see a lot of management shake ups, layoffs and shifts in strategy because of the changing business environment,” added Mr Kuyoh.

In Kenya, the banking sector was further  impacted  by the closure of  Dubai Bank (Tier 3 bank) and Imperial Bank  (Tier 2 Bank) in quick succession, leading  to a crisis of confidence in the sector, particularly those in the mid to lower tier  and  raising  concerns over the regulator’s ability to effectively supervise the banking sector.

“Investors’ panic has resulted in banking stocks plummeting to 12 month lows. The rapid decline in banking stock prices over recent weeks is a consequence of macroeconomic and market sentiments, hence has little or no relationship with companies or the sector’s fundamentals,” an analysts at AIB Capital said.

“This year has been a tough year for most of the banks because of the high interest rates, which slowed borrowing and increased the levels of non-performing loans. As a result, foreign banks are recording diminishing profitability while growth for local banks is modest, except the Equity Bank, KCB and Co-operative Bank, which recorded double digit growth in profit,” said Eric Munywoki, research analyst at Old Mutual Securities Ltd.

“The liquidation of the two banks [Dubai and Imperial] made a lot of foreign investors sceptical about Kenya’s banking sector. All this had an impact on the banking stocks in the equities market,” added Mr Munywoki.

Nairobi Securities Exchange is home to the highest number of listed banks, (11), excluding the cross-listed Kenyan banks compared with five listed local banks in Tanzania, three in Uganda and one in Rwanda.

According to the AIB Capital financial sector report, Kenyan banks, on average, earn twice as much return on equity (ROE) and a higher Return on Assets (ROA) as their regional peers due to high efficiency and economies of scale.

Over the years, Kenyan banks have developed a strong propensity towards innovation, leveraging technology such as mobile banking to penetrate the mass market, particularly retail and the SMEs. Ugandan and Tanzanian banks are the least diversified, with the lowest ratios of non-interest revenues to total income.

As at June 2015, Tanzania had the highest ratio of non- performing loans.

These countries also have a significant large allocation of funds towards loans and advances, representing around 57 per cent of their assets.