Four top Kenyan banks will have to increase their loan loss provisions by Ksh36 billion ($360 million) under the new accounting regulations, which take effect in a week’s time.

The Central Bank is expected to give bankers at least 12 months to build up their provisions to the required levels under the new regulations, known as IFRS 9.

Analysts at EFG Hermes Kenya, an investment firm, estimate that KCB will have to increase its loan loss provisions by Ksh17.5 billion ($175 million), while Equity will have to set aside an additional Ksh10 billion ($100 million).

Co-operative Bank of Kenya needs Ksh6 billion ($60 million) while Stanbic will have to raise Ksh2.5 billion ($25 million) to comply with the IFRS 9.

The accounting standard taking effect on January 1 requires banks to provide for potential defaults, unlike in the present where they only set aside a buffer for actual non-performing loans.

EFG Hermes say that bank-specific non-performing loan ratios will have to increase to 75 per cent under the IFRS 9.

Other analysts have been cautious in quantifying the likely impact of the IFRS 9 due to its subjective nature.

The standard does not apportion risk figures to be applied for each facility, but leaves it to the management to assign a default rate on a loan, based on their understanding of the client, the economy and the industry. The management has to justify their opinion to the auditors.

“Before management’s disclosure of key variables used for scenarios testing, it is practically impossible to anticipate the outcome of the IFRS 9 on loan loss provisions,” said Francis Mwangi, head of research at Standard Investment Bank. 

The shocks

To shelter the banking sector from the shocks of its implementation, the CBK is expected to give banks a grace period to fully comply.

But EFG Hermes, in a report released a week ago, said that the “soft landing” offered by the CBK may not be sufficient for banks outside the top 10 bracket due to under-provisioning for bad loans.

According to the report, unprovisioned loans accounted for 53 per cent of the core capital for the 30 banks ranked outside the top-10 in terms of market share.

Given their low profitability mainly attributed to the capping of interest rates, the smaller banks will find it hard to implement the regulations and may be forced to turn to shareholders for additional capital.