By JAMES ANYANZWA

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Kenya’s banking sector is upbeat as top banks announce huge profits and record dividend payout to shareholders for the year ended December 31, in an economy struggling to regain its footing following the Covid-19 pandemic shocks.

After a period of reduction in net earnings, mass layoffs and freezing of dividends in 2020, Kenyan lenders have suddenly bounced back amid modest growth in revenues and reduction in operating expenses.

So far six top tier banks which have published their financial performance figures for the 12 months to December 31, posting on average over 80 percent growth in net profit.

These are Absa Bank Kenya which recorded the highest jump in net profit by 161 percent, followed by Equity Bank (99 percent), KCB (74 percent), Standard Chartered Bank Kenya (66 percent), Co-operative bank (53 percent) and Stanbic Holdings Ltd (39 percent).

The EastAfrican has learnt that inside the glittering profit numbers are huge write-backs on loan loss provisions which were aggressively provided for by bank managers seeking to take advantage of the Covid-19 shocks to clean up their bad books in 2020.

This is process of restoring to profit a provision for bad or doubtful debts previously made against profits and no longer required after the loan starts to perform.

“There are two things at play here. The implementation of the International Financial Reporting Standard (IFRS9) provided that banks should have more forward looking provisions for bad and doubtful debts which was to happen as from the end of 2019. So when Covid-19 came into play, you realise that banks had a dip in profitability because they were very aggressive in their provisioning,” an industry insider who didn’t want to be named told The EastAfrican.

“So many of the banks took advantage of the slowdown in economic growth during the Covid-19 period to do what is called the book ‘clean up.’ So instead of registering very high profits at a time when the economy is on its knees they were more aggressive in provisioning for bad and doubtful debts and even more aggressive than the IFRS 9 requirements which could be conservative under such circumstances.”

The EastAfrican has learnt that the recovery of some of the bank loans which had been deemed bad and non-performing prompted lenders to significantly reduce provisions and push up profitability.

“In the event that those provisions didn’t result into default then there were huge write backs. So what you are seeing is really as a result of huge write backs as a result of aggressive provisioning during the Covid-19 period,” said the source.

The EastAfrican understands that the jump in profitability is also due to the fact that the base year (2020) upon which comparison is done, was a period in which lenders had seen a huge dip in profitability.

“Remember the Central Bank also made some accommodations as far as loan loss provisioning is concerned. This is really what I can call a post-2020 base period. So what you are seeing if somebody is reporting almost double profit, much of that is as a result of what I would call the base effect where the base effect means the year (2020) against which you are measuring the growth, there was a sharp reduction in profitability,” said the source.

“So that is substantially accounting for what you are seeing. If the loan book is not growing then the only line in which profitability can grow from is from write backs. So those are the two factors that can account for the huge jump in profit but the main one is really write backs as a result of aggressive provisioning that happened during the Covid-19 period.”

A study by analysts at AfricanFinancials shows that prior to the pandemic period, Kenyan banks had under provisioned their bad loan books by an average of $248 million for five years before they more than doubled it to $444 million in 2020 from $157 million in 2019.

The analysts through a report titled Sub-Sahara Africa; December 2020 Bank Bad Debt Charge-Offs, Tracking Covid-19 precautionary provisioning, dated March 2021 say that East African and Mauritian banks over-provisioned their bad and doubtful loans by $224 million in 2020.

The increased provisioning by Kenyan lenders during the Covid-19 period was also compounded by the Central Bank which provided flexibility to banks with regard to requirements for loan classification and provisioning for loans that were performing on March 2, 2020 and whose repayment period was extended or were restructured due to the pandemic.

The one-year window through which the lenders had extended and restructured the loan repayments for customers adversely impacted by the pandemic expired on March 2, 2021 and the borrowers were given three months to regularise their loan repayments.

According to CBK, loans amounting to Ksh1.7 trillion ($14.91 billion) were restructured during the period from March 3, 2020 to February 2021, accounting for 57 percent of the banking sector’s gross loans. In 2019, Kenyan banks started implementing the IFRS 9 which requires them to set aside greater provisions for expected credit losses.

Under the IFRS9, which replaced the International Accounting Standard (IAS) 39, banks are expected to provide for projected loan losses rather than those already incurred, thereby reducing their profitability and eroding their capital base.

Data from the Central Bank of Kenya shows that last year (2021), Kenyan banks conservatively sat on excessive liquidity and reduced lending to key sectors of the economy to reduce exposure on loan defaults and loan loss provisions to remain profitable.

According to the central bank’s monthly statistical bulletin, banks increased lending by only 2.25 percent ($121.92 million) to Ksh631.1 billion ($5.53 billion) in 2021 from Ksh617.2 billion ($5.41 billion) in 2020.

The banks also reduced lending to agriculture and real estate by Ksh11.9 billion ($104.38 million) and Ksh30.1 billion ($264.03 million) respectively.

Also hard hit was the building and construction and private household sectors whose loans were reduced by Ksh1.7 billion ($14.91 million) and Ksh2 billion ($17.54 million) respectively.

Banks also reduced lending to the finance and insurance sector by Ksh800 million ($7.01 million) and consumer durables by Ksh900 million ($7.89 million). Total bank lending to the government also declined slightly by five percent ($171.05 million) to Ksh380.3 billion ($3.33 billion) in 2021 from Ksh399.8 billion($3.5 billion) in 2020, according to Central Bank data.

Reduction in lending reduces loan loss provisioning as per the IFRS 9 requirements.