Top banks in Kenya have raised a red flag over an expected significant drop in net earnings for the year 2020.
They cite deteriorating economic conditions and the Covid-19 containment measures, which have seen the entire banking industry lose over Ksh1.2 billion ($11 million) worth of revenues from card payments to telcos mobile payment platforms in nine months.
The Central bank’s latest data shows that Kenyan banks lost Ksh1.26 billion ($11.55 million) worth of card payment business to mobile telephone operators between March and November last year as customers stopped using debit cards, credit cards and prepaid charge cards in favour of mobile money payment platforms such as M-Pesa, whose transactions of up to Ksh1,000 ($9.17) were made free of charge.
During the period, CBK also provided a shot in the arm for mobile money payment options by abolishing charges on the transfer of money from customers’ bank accounts to mobile money wallets and vice versa.
The banking regulator also increased the transaction limit for mobile money to Ksh150,000 ($1,376) from Ksh70,000 ($642) and increased the daily limit for mobile money transactions and mobile money wallet limit to Ksh300, 000 ($2,752) from Ksh140, 000 ($1,284).
As a result, data from Central Bank shows that the value of payment transactions through banks’ debit cards, credit cards and prepaid charge cards declined by eight per cent to Ksh13.79 billion ($126.51 million) in November 2020 from Ksh15.05 billion ($138.07 million) in March 2020.
On the other hand, the value of mobile money payments increased by 44.5 percent to Ksh526.8 billion ($4.83 billion) from Ksh364.51 billion ($3.34 billion) in the same period.
So far, six top banks have issued profit warnings cautioning shareholders that their earnings for 2020 will fall by at least 25 per cent, implying that the shareholders should brace for reduced or no dividends, while bank managers could go without bonuses.
The lenders include Standard Chartered Bank Kenya, Absa Bank, I&M Bank, Diamond Trust Bank, NCBA and Co-operative bank, with signs that more banks could issue profit warnings.
Market analysts argue that while Covid-19 pandemic containment measures have hit the banks’ earnings hard, the lenders’ fundamentals had begun to weaken prior to the pandemic owing to macroeconomic shifts.
“This period (Covid-19) was more a secondary catalyst than the core driver of lower earnings,” said Daniel Kuyoh, a Nairobi-based financial analyst.
“Lenders have largely kept to their traditional business models with Kenyan banks focusing largely on trading government bonds rather than lending to the productive sectors of the economy. This conservative market action, while effective in protecting short-term value, I’m not confident it can generate significant value in the long-term with dynamic macroeconomic fundamentals,” he added.
According to the Kenya Bankers Association (KBA), the performance of Kenyan banks in 2020 was adversely affected by the removal of transaction charges on digital platforms, rising non-performing loans (NPLs) and a slowdown in credit growth with almost 50 per cent of the industry’s Ksh2.9 trillion ($26.6 billion) loan book being restructured to cushion borrowers whose incomes were disrupted by the Covid-19 pandemic.
“With Covid-19 there were a number of measures taken by the industry in conjunction with Central Bank for instance removing of the transaction charges on digital platforms. You see this is a foregone revenue because transaction charges are a good revenue source for banks,” Habil Olaka, the association’s chief executive told The EastAfrican in an interview last week.
During the nine months period (January-November 2020) the National Treasury through Central bank borrowed Ksh514 billion ($4.71 billion) from the domestic market through treasury bills and bonds with Kenyan banks providing 54 per cent Ksh277.56 billion ($2.54 billion) of the debt.
According to Edwin Chui, head of research & strategy at Dyer & Blair Investment Bank, Kenyan banks have had inherent problems which have been exacerbated by the pandemic.
“There were some inherent problems that have been accelerated by Covid-19,” said Mr Chui.
However, Francis Mwangi, the chief executive of Kestrel Capital, is of the view that the projected poor performance of the Kenyan banks is largely Covid-19 linked due to the expected jump in loan loss provisions to cushion against high default risk.
“My view is that the warnings are mainly Covid related since the main reason is significant increase in provisioning. A good number of banks were able to post increased income before provisions and stable or lower operating expense,” said Mr. Mwangi.
Co-operative Bank in a circular to shareholders said the loan loss provisions have been much higher than the previous year as households and businesses grapple with meeting their obligations to the bank due to the economic disruption caused by the pandemic.
“We continue to actively engage our customers to support them through this difficult period by re-aligning the servicing of loan facilities, their funding and transactional needs as the situation unfolds,” said Samuel Kibugi, Co-operative Bank’s company secretary.
According to Absa Bank (Kenya) the significant increase in impairment costs in light of the Covid-19 pandemic coupled with exceptional costs related to its separation from Barclays Bank Plc incurred during the year are expected to significantly lower the lender's net profit for 2020.
Trends and forecasts show that the rate of impairment is increasing due to delayed loan repayments and potential additional stress due to Covid-19 after-effects,” said Loise Gakumo, company secretary for Absa (Kenya).
A battered economy together with the Covid-19 containment measures have inflicted financial bruises on banks’ operations, with both interest and non-interest incomes bearing the brunt of reduced banking transactions and reduced lending.
During the 12 months period to June 30, 2020 the banks’ profits declined by 30 per cent and assets quality deteriorated, with the ratio of non-performing loans (NPLs) to gross loans increasing to 13.1 per cent in June 2020 from 12 per cent in December 2019 according to CBK.
The industry’s capital and liquidity buffers stood at 18.5 per cent and 53.1 per cent against the statutory minimum requirements of 14.5 per cent and 20 per cent, respectively.
It is argued that a sharp coronavirus-related economic slowdown in Kenya will weaken banks’ loan quality and profits, but strong capital and liquidity and government support measures will provide financial resilience.