Big banks on the spot over bad loans, profit reporting

Kenyan banks have been overstating their profits and under-providing for bad loans by large margins even as public anger rises against the “super profits” they make from their clients, a newly released report says.   

Failure to observe international accounting standards (IAS) has left wide gaps in the financial services market that many banks are using to disproportionately blow up their earnings, says the report by Citi Group. 

The report points to the steady drop in provisions for bad loans in the face of robust lending growth as an example of accounting that runs against best practices.
Ordinarily, provisioning for bad loans tends to reduce bank profits – meaning that a drop in provisioning has the reverse impact of blowing up earnings.

“The six largest banks may be under provisioned by Sh20.8 billion,” says Citi Group.

“We estimate that International Accounting Standards (IAS) 39 adjustments overstated the profits of Equity Bank in 2007, KCB in 2011, Barclays Bank in 2009, Co-operative Bank in 2008 and CFC Stanbic in 2008 by 15, 19, 23, 10 and 23 per cent respectively,” says the report titled “Don’t get caught when the music stops”.

Rule 39 of the IAS speaks to reclassification of government securities held by banks demanding that they be done at market value and not through mere transfers in the books.

Banking executives dismissed the report, terming it biased “because it has authored by an interested party”.

The findings put the sector regulator, the Central Bank of Kenya, under the spotlight – especially over its enforcement of accounting rules.

Njuguna Ndung’u, the Central Bank governor, declined to comment on the findings, saying that such a report needed to be done by a neutral party.

“I cannot comment on this because it will sound defensive but we need a neutral party to make such an analysis,” Prof Ndung’u said.

Richard Etemesi, CEO of Standard Chartered Bank, said: “In my view this is a ridiculous report, very shoddily put together with absolutely no work done to validate preposterous allegations.” He added that the Kenyan banking sector is highly regulated and the figures produced are audited by international firms of auditors and also the CBK.

“Therefore to suggest that the published numbers could be manipulated by banks in any way is bordering on the ridiculous.”

Citi Bank operates in Kenya but is not listed at the Nairobi Securities Exchange unlike the banks analysed in the report.

Last year, the sector posted Sh89.5 billion in pre-tax profits, a 20.5 per cent increase from 2010’s Sh74.3 billion.

This outcome caused public furore that sparked a heated debate in Parliament where MPs made fresh efforts to cap the pricing of bank loans.