Bank investors face dividend cut as bad loans cover rise

Listed banks have nearly doubled the provisioning for non-performing loans in their books over the past one year, pointing towards reduced or flat dividends for shareholders in 2016.

The 11 listed lenders have reported a combined increase of Sh11 billion to Sh25 billion of loan-loss provision in their profit and loss statements — equivalent to an 80 per cent rise— between September 2015 and September 2016. This means that the amount of profit allocated to dividends will go down.

Listed banks paid dividends of between 80 cents and Sh17 in 2015, with National Bank of Kenya the only lender not to pay a return to its shareholders for the year.

Company filings show that out of the 11 listed banks, only KCB reduced the amount it set aside to provide for bad loans on the operating expense column between September 2015 and 2016.

“Shareholders of listed banks now face reduced dividends as the lenders divert resources to cushion against mounting bad debts that have rocked the industry… reducing the amount of profit allocated to dividends,” said Kingdom Securities analysts in a note to clients.

“In Kenya, the Central Bank’s prudential guidelines require all institutions to maintain adequate provisions for bad and doubtful debts prior to declaring profits or dividends. The banks are also required to limit the amount of interest they can recover on non-performing loans.”

In percentage terms, the largest increase in loan-loss provision year-on-year to September has been recorded by NIC Bank, up by 364 per cent from Sh689 million to Sh3.2 billion.

National Bank increased its provisioning by 226 per cent from Sh586 million to Sh1.9 billion, while Barclays Kenya’s rose by 218 per cent from Sh987 million to Sh2.1 billion.

The lenders are also likely to start seeing some effect of the rate cap on their interest income in quarter four of 2016 — although the full implication on profit and loss will be seen next year.

The earnings per share of listed lenders still grew by an average of by 15.1 per cent year-on-year in the third quarter, analysis by Cytonn Investment shows.

Last year, the highest dividend payout among listed banks was by Standard Chartered at Sh17 a share, giving the bank’s shareholders a dividend yield of nine per cent. Stanbic paid a dividend of Sh6.15 a share, while I&M Bank and Diamond Trust Bank paid shareholders Sh2.90 and Sh2.50 a share respectively.

READ: Bad loans reach Sh207bn as borrowers hit hard times

Although falling share prices mean the dividend yield is likely to remain high, the actual payout per share will suffer in case of a fall in profit growth.

The CBK has been enforcing stricter rules in accounting for bad debts following the collapse of three banks in quick succession last year, leading to a jump in lenders’ non-performing loan portfolios and provisioning for the same.

The value of bad loans on banks’ books rose by Sh17 billion to Sh207 billion between June and September this year, marking the first time this number has crossed the Sh200 billion line.

“This has led to a deterioration in industry cost-to-income ratios, with listed banks average being 57 per cent up from 47 per cent in quarter three of 2015. We, however, expect the level of provisioning to stabilise going forward as banks adopt more stringent risk assessment framework,” said Cytonn Investments in its banking sector quarter three report.

Analysts though say the growth in non-performing loans should bottom out going forward as banks adapt the stricter standards demanded by the regulator.

The average non-performing loan ratio (NPLs to total loans) for listed banks stood at 8.3 per cent in quarter three, compared to 6.7 per cent in June, indicating that they have adjusted their books for previously unreported NPLs.