Kenyan banks in big trouble over locust, Covid-19 shocks

Tuesday October 20 2020

A shop with various agency banking counters in Nakuru. KCB, Equity, NCBA, Co-operative Bank, DTB, Absa, StanChart and Stanbic started 2020 with by deteriorating asset quality. FILE PHOTO | NMG


Top Kenyan banks have yielded to the Covid-19 pandemic with grim prospects of weaker profitability, slowed loan book growth and a surge in the volume of bad loans, signaling reduced dividends for shareholders and reduced corporate tax to the government this year.

According to a special report by rating agency Fitch on eight banks that control 83 percent of the industry’s deposits and 76 percent of the total assets, weaker operating conditions have resulted in substantially lower earnings and profitability metrics for the lenders that have also borne the brunt of huge loan restructuring to protect borrowers whose loan repayments have been impacted by the Covid-19 pandemic.

The situation has been compounded by the severe locust infestation since July 2019 which could create further pressure on the banks’ asset quality through lending to the small-scale farmers and farming communities.

Debt relief measures granted to distressed borrowers to mitigate the effects of the Covid-19 pandemic and the subdued loan growth are also expected to dampen profitability.

Fitch, through its report titled 'Coronavirus Impact on Large Kenyan Banks’ shows that the annualised average net income to average equity ratio of these large banks declined by 730 basis points (bp) to 11.6 percent in the first six months of this year.

The report dated October 8 shows that the lenders — KCB, Equity, NCBA, Co-operative Bank, Diamond Trust Bank (DTB), Absa Bank (Kenya) Standard Chartered Bank (Kenya) and Stanbic Bank (Kenya) — started the year 2020 on a weaker footing characterised by deteriorating asset quality, with an average impaired loan ratio of 11.2 percent last year compared with 9.9 percent in 2018.


KCB's asset quality deterioration was largely driven by the consolidation of National Bank of Kenya (NBK), which pushed its impaired loan ratio upwards by 300bp to 15.4 percent in 2019.

“Risks are tilted to the downside again. The coronavirus pandemic will reverse the benefits to banks from the repeal of the interest rate cap in terms of lending growth, asset quality and earnings,” said Vincent Martin, an analyst at the rating agency.

Personal lending

According to Fitch, banks with the largest exposures to personal lending are particularly exposed to higher loan impairments, with other stressed sectors including manufacturing and trade.

Based on Fitch’s estimates, the most exposed (based on 2019 figures) to personal lending among the large banks are Absa (46 percent), KCB (37 percent) and Stanbic Bank (24 percent), while around 44 percent of Co-operative Bank’s loans and 24 percent of Equity bank’s loans were to manufacturing and trade sectors respectively.

“The coronavirus shock poses significant downside risks to Kenyan banks’ credit profiles,” said the agency.

The average net interest income (NIM) for the large banks declined from 7.4 percent in 2019 to 6.9 percent in the six months to June (2020) due to the combined effects of lower interest rates, muted loan growth and loan restructuring.In addition, pressure on NIMs reflected lower yields on government securities, which on average formed a high 27 percent of the large Kenyan banks’ balance sheet last year.

According to the report, additional pressure on earnings will arise from lower non-interest revenue generation due to the combined effect of lower transactional activity and the Central Bank’s measures to waive fees on electronic transactions.

Non-funded income contribution to gross revenues of the large banks during the first half of this year declined by 150bp to 35.3 percent on average.

It is argued that while earnings for the large banks will be considerably lower this year, the main pressure on profitability will come from higher loan impairments costs which consumed an estimated 40.4 percent of the profits during the first half of the year, a substantial increase from 17.5 percent in 2019.

As a result large Kenyan banks’ capitalisation metrics will come under pressure, although the extent of the decline will be limited by subdued lending growth and potential regulatory restrictions on dividend payments.

“In the context of heightened market uncertainty and a lower appetite to lend, we expect banks to further increase their holdings of lower-risk or low-yield government securities,” according to the report.

“Looking into the next 12 to 18 months, our view is that Kenyan banks will respond to the current challenges posed by the weakening operating environment in Kenya and regionally by adopting prudent growth strategies. As a result, we expect private-sector credit to grow by a tepid 1 percent to 2 percent in 2020 compared with 1.8 percent in 2019, which we consider to be significantly below the sector's potential.”


The banks recorded a sharp decline in profitability during the first six months (January-June) this year due to falling earnings, reflecting policy rate cuts, lower client activity and rising loan impairment charges (LICs).

However, the report shows that large Kenyan banks are primarily funded by stable customer deposits, with previous experiences of financial stress showing that they benefit from a “flight to quality” by attracting higher deposit levels due to concerns surrounding the financial health of smaller banks.

In addition, their funding is largely in local currency, which limits the risks associated with reliance on foreign currency funding. Although loan books expanded in the first six months this year mainly to the corporate sector, growth rates declined after April due to the lockdown.

Fitch forecasts Kenya’s gross domestic product (GDP growth) to slow to one percent in 2020, a record low since 2008, as the slowdown in global trade and services hits key economic drivers, such as exports, tourism and agribusiness.

“Operating environment pressures will result in weaker asset quality and profitability metrics in 2020, with capitalisation, funding and liquidity less affected,” said Fitch.

The agency however notes that Kenyan economy’s diversified nature offers important growth opportunities for banks and some buffer against the economic impact of the Covid-19 pandemic.

According to the agency the weakening of the banks’ asset quality reflects a combination of persistently challenging economic conditions and a sustained period of low loan growth.

Asset quality was weak even before the coronavirus shock. The sector’s average NPL ratio was a high of 13.6 percent (excluding loans that were subject of debt relief measures) in August this year (2020) compared to 12 percent in 2019.