Bad loans burden puts pressure on Kenyan banks

The continuing build up of the bad loans burden is causing stress in a number of Kenyan banks, prompting the International Monetary Fund (IMF) to demand increased vigilance from the regulator.

The IMF says three commercial banks that hold 13 per cent of the total industry deposits are operating in a high risk territory as the global economic recession deepens and a slowdown of growth persists at home.

Banking sector insiders said the Central Bank has responded to the IMF’s concerns by inspecting a major international bank and introducing additional reporting standards for non-performing loans that are seen to be the industry’s soft belly.

Though involving only three out of Kenya’s 45 commercial banks, instability of any one player is always seen as a market-wide problem because of the risk of contagion – the spread of instability among institutions that do business with each other.

Without mentioning the institutions by name, the IMF warns that in the coming months, institutions exposed to tourism and export earnings will come under increasing stress and recommends that regulators remain on high alert.

Mr Peterson Mwangi, the managing director of Afrika Investment Bank, said news of three institutions being close to the minimum Capital to Asset Ratio (CAR) was “distressing” especially at this time when the capital market is in a confidence crisis.

“It is however unlikely that any of the large banks are involved because they control a larger fraction of the sector’s assets than the 13 per cent mentioned by the IMF,” he said.

The top five banks including KCB, Barclays, StanChart, Co-op and Equity control 51 per cent of the industry’s total assets, according to CBK data for the first quarter of 2009.

Mr Chris Gacicio, the personal assistant to the CBK governor, said the IMF report was based on the 2008 performance of commercial banks and that capitalization of most banks had improved since then.

“All prudential ratios within the banking system are healthy, liquidity, capital adequacies are above the statutory minimum required,” he said.

To assess the health of commercial banks, the IMF used CAR which measures the level of capitalisation against its total assets.

The higher the ratio the more stable a bank is. Kenyan banks have a minimum of 12 per cent CAR. High capital to asset ratio means an institution is better protected against operating losses than those with lower ratios.

Although all Kenyan banks are currently operating above the minimum capital requirements, analysts said the IMFs concern may be directed at those operating close to the boundary.

“Initial stress tests indicate that in the event of deterioration in loan performance, three banks whose CAR’s are just above the required level would need to replenish their capital,” the IMF said.

Since last year, Kenyan banks have reported increased loans default levels as shown by the gross non performing loans (NPLs) and loan impairment provisions for 2008 and the first quarter of this year.

The stock of NPLs expanded by 7.8 per cent to Sh64.9 billion by March 31, 2009 from Sh58.3 billion the previous year, according to the April 2009 CBK monthly review.

“As a result, asset quality, which is measured by the proportion of net non-performing loans to gross loans deteriorated to 3.7 per cent from 3.6 per cent during the same period,” the CBK said.Loss provisions rose by 14 per cent in the year to March 2009 compared to similar period in 2008.

This state of affairs led the IMF to warn that the quality of loan portfolios is likely to deteriorate in the months ahead, particularly in banks that are exposed to tourism and export sectors.

The CBK report however, points to some improvement in profitability and deposits which went up by nearly 14 and 17 per cent, respectively, compared to 2008.

The IMF report was prepared after discussions with Kenyan government officials to determine future engagements with the fund following Nairobi’s request for balance of payment assistance to supplement the low foreign exchange receipts in the past 18 months.

It was at the same meeting that the Central Bank promised to act to ensure that the financial institutions concerned do not reach crisis point.

The CBK has not publicly reported the state of the banking sector in the same pointed terms as the IMF, whose May 15 report is posted on the institution’s website.

Some analysts said publication of the report may be a signal that the IMF intends to pile pressure on the government to intensify its bank supervision.

“To address the increased risks to the financial sector, the CBK should intensify its oversight to ensure that banks are correctly classifying loans and making adequate and timely provision for bad and doubtful loans,” the IMF says.

Reports indicate that the CBK has asked for technical assistance to develop a contingency plan for the financial sector, showing a readiness to act in the event that the situation deteriorates.

Fear of default
Tiberius Barasa, an economist with Institute of Policy Analysis and Research (IPAR), warned that a deterioration of the economy could lead to a situation where banks would not lend to any sector due to fear of default, pushing the economy downward, he said.

“I think measures being put to revive the economy should work for all sectors. Banks will be affected all the more if the economy does not perform well,” he said.

Action by the Central Bank against the commercial banks, he said, should be tempered with the understanding that the economy has been affected by shocks in the past year but the situation was likely to improve for all sectors when the economy turns for the better.

In Kenya, the minimum capital assets ratio (CAR) is 12 per cent, a ratio that the multilateral body noted that all banks reached in 2008 as was case for the previous year.