High interest rates leave banks with Sh70bn in bad loans

High interest rates and economic shocks linked to the March 4 General Election have rendered thousands of borrowers unable to service bank debts, pushing the volume of bad loans in Kenya to a five-year high.

The latest data from the Central Bank of Kenya (CBK) shows that non-performing loans held by commercial banks rose to Sh70 billion in March as borrowers felt the impact of reduced government and private sector spending in the run-up to the elections.

This was 14.1 per cent higher than the Sh61.6 billion bad loans that the lenders held in December 2012.

The lenders have been slow in following the central bank’s interest rates signals choosing instead to retain the lending rates at an average of 18 per cent in the past 18 months, leaving borrowers with a heavy servicing burden.
The volume of bad loans last rose to this level in May 2009 when it stood at Sh69 billion.

The CBK data, however, shows that the increase in bad loans was the only bleach to the lenders’ first quarter performance having posted a 14.4 per cent increase in profitability and lent out Sh40 billion in new loans that pushed total advances to Sh1.4 trillion.

A loan is considered to be non-performing if it is not serviced for a period of more than three months.

“Most banks did not reduce their lending rates despite the clear signals from the CBK ultimately slowing down new lending but the wider net interest margins helped them grow their profits,” said Vimal Parmar, the head of research at Burbidge Capital.

Despite the robust earnings that the lenders get from high interest margins, the growth in bad loans forces them to make higher provisions that ultimately impact on profitability.

Kenya’s top two banks, KCB and Equity announced double digit growth in the volume of NPLs during the first quarter of the year. Equity Bank has since attributed the growth in bad loans to delay by the government to settle payments to the private sector.

SMEs were greatly impacted by late payments in December 2012. Equity Bank undertook a strategic decision in 2012 to increase provisions above prudential guidelines given the macro uncertainties,” said the bank’s CEO James Mwangi during an investor briefing held last week.

KCB has identified the reduction of the NPL ratio and recoveries of non-performing loans as key drivers of its future performance.

The steep rise in bad loans has forced banks to pay close attention to the quality of their loan books instead of looking for new borrowers.

“Our NPL remained at the same level. We have had aggressive customer visits to find out how we help each other, including finding out how they collect from their debtors,” said Albert Ruturi, the CEO of K-Rep Bank.

Sam Omukoko, the managing director of Metropol Credit Bureau, said the number of credit report requests from the banks went down in the first quarter of the year indicating a drop in lending. The number of people whose loan servicing fell into arrears and had their details forwarded to the bureaus also increased.

“The references went down but the number of accounts reported increased,” said Mr Omukoko.

In addition to listing defaulters with the bureaus, the banks turn to loan guarantors and sale of assets in the case of secured loans that could well be the source of a borrower’s livelihood before writing off the debts.

Credit officers said most lenders were not enthusiastic about the sale of assets held as security citing the absence of buyers in the market.

Kenyan banks made Sh28.2 billion in pre-tax profits in the first quarter of the year up from Sh24.7 billion posted in a similar period last year putting the industry on the path to surpassing last year’s record industry profit of Sh107.68 billion.

Two of the three banks that closed 2012 in the loss-making territory —Ecobank and Equatorial Commercial Bank — returned to profitability in the first quarter of the year as the cost of funds, which weighed down the small lenders last year, eased but lending rates remained high.

The 14.4 per cent growth in the industry’s profits was, however, lower than last year’s expansion rate of 24.1 per cent in the first quarter.

“Quarter on quarter profitability was positive and this is good because the sector has had two consecutive quarters of negative   profitability growth,” said Francis Mwangi, the head of research at Standard Investment Bank.

Political uncertainty in the run-up to the March 4 elections saw investors shelve their growth plans forcing the volume of new loans issued down to Sh40 billion in the first quarter of the year compared to Sh50 billion registered between January and March last year.

The lenders’ profitability also benefited from the rise in customer savings to Sh1.78 trillion from Sh1.76 trillion in December. The amount of cash held by banks as captured by the liquidity ratio, which stood at 42.8 per cent, was high indicating that they have room to expand their lending.

(Read: Lenders likely to lower borrowing costs, survey shows)

The lenders’ bad loans book has been growing steadily since the last quarter of 2011 a year after the CBK adopted a tight monetary policy stance to control inflation and shield a volatile shilling.

The stock of loan defaults stood at Sh53.8 billion at the end of 2011 meaning it grew by a margin of Sh16 billion in 15 months. It is estimated that the pile-up of bad loans would be much faster were it not for a deal between the Treasury and Kenya Bankers Association that capped the increase on monthly instalments at 20 per cent and allowed for bulk payoff without penalties.

The lenders will be banking on the peaceful conclusion of the recent election and the smooth transfer of power to boost economic growth and bring down the rate of defaults.

Robust economic growth should also lift credit growth making it easy for the lenders to absorb the steep rise in non-performing loans.

Banks have to maintain a provisional pool matching the level of exposure to cater for any possible default that is deducted from income as an expense.

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