Banks’ half-year pre-tax profit soars to Sh61.5 billion

Commercial banks’ pre-tax profit for the first six months of the year have soared to Sh61.5 billion, reflecting a faster pace of economic growth following the peaceful March 4 General Election and transfer of power.

Data from the Central Bank of Kenya shows banks’ profit jumped 15.6 per cent compared to the same time last year when the lenders earned Sh53.2 billion in the first six months of the year.

The banks’ profits shot up in the second quarter of the year, reflecting an economic dividend that came with the peaceful March 4 poll.

“The banking sector profit before tax for the quarter ended June 2013 increased by 17.7 per cent from Sh28.2 billion in the March 2013 quarter compared to Sh33.2 billion for the quarter ending June 2013,” said CBK in its half-year industry report.

Profitability of the sector increased by 15.6 per cent to Sh61.5 billion from the Sh53.2 billion registered in June 2012.

The growth in profit was boosted by increased lending by the banks, which loaned out Sh50 billion in the three months between March and June compared to Sh40 billion in the first quarter of the year. The industry’s total loan book now stands at Sh1.45 trillion.

The increased new loans followed a drop in lending rates, which was however accompanied by a faster drop in the deposit rates leaving the banks enjoying wider margins.

In the second quarter the interest paid by the banks to depositors constituted 30 per cent of the industry expenses, down from 42 per cent in March. Banks are holding a total of Sh1.86 trillion in savings, up from Sh1.78 trillion three months earlier.

Agency banking is a key contributor to the cheaper deposits, with CBK reporting that the licensed 19,649 agents conducted 10.2 million transactions valued at Sh60.4 billion in the three months between March and June.

Continued rise of default loans however remains a concern in the industry, with loans that have not been serviced for the last three months rising by 10 per cent to Sh77.3 billion.

“Non-performing loans went up faster than the loans. Going forward, this will affect bank profits because they have to make provisions for them,” said the head of research at Burbidge Capital, Vimal Parmar.

Trade segment was the key driver of the non-performing loans (NPLs) after its defaults increased by Sh4.8 billion in the three months.

Equity Bank, which is the only lender among the large banks to have reported its first half performance, said its defaults had risen to Sh7.1 billion from Sh3.7 billion a year earlier attributing the growth to delayed payments by the government to private businesses.

High liquidity

“We have made provisions of Sh1.6 billion which can be easily reversed if SMEs are paid and Uganda pays its police and teachers,” said Equity Bank chief executive James Mwangi.

The banks’ liquidity remained high, at 42.7 per cent, due to deposit mobilisation creating hopes of increased lending activities in the second half of the year. Mr Parmar said the industry’s second half performance will be determined by interest rates as borrowing is expected to continue increasing so long as the price is attractive.

However, a rise in interest rates in the money markets is likely to push up the cost of deposits as huge depositors challenge the banks to match Treasury rates eating up on bank margins. Traditionally, banks perform better in the second half of the year.

Last year the banks recorded pretax profits of Sh107.9 billion and look certain to outperform that this year.

This has seen investors rush for banking sector shares at the Nairobi Security Exchange with over 24.8 million units changing hands last week but with minimal price movements.

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