Kenya, Ghana banks top equity earnings in Moody’s study

Kenyan and Ghanaian commercial banks lead in returns to shareholders according to an analysis covering 32 banks in 10 African countries done by rating agency Moody’s.

In the study, Moody’s said Kenya’s return on equity (RoE) is nearly six per cent, which is similar to Ghana’s. The ratio is obtained by dividing the net profit by total equity in a company, multiplied by 100 to get the percentage. It reflects how much profit is generated by investing every Sh100 in a business.

Though RoE is high, Kenya has recently shown deteriorating profitability. However, other metrics used in the analysis — capital, the operating environment, asset risk, funding and liquidity as well as government support — are stable for local sector.

In the nine months to September this year, Kenya’s listed commercial banks recorded a profit growth of just above 10 per cent down from about 15 per cent in a similar period last year. The profits are being registered against an increase in credit to the private sector and requirement for higher capital ratios relative to last year.

“Capital and funding/liquidity are the key pillars of stability, providing banks with robust buffers to withstand pressures in operating and credit conditions,” said Moody’s.

Kenya increased the capital ratios for banks from the beginning of this year. Banks are supposed to keep core capital to total risk-weighted assets of 10.5 per cent up from 8.0 per cent last year.

They are also required to maintain a 14.5 per cent ratio in terms of total capital-to-total risk-weighted assets, up from 12 per cent last year.

In the analysis, the rating agency said African banks are largely stable but added that in half of the countries covered in the RoE analysis — Angola, Ghana, Nigeria, South Africa and Tunisia — the institutions were facing a deteriorating operating environment and asset risks.

Besides Kenya, the other countries with deteriorating profitability are Ghana, Angola and Nigeria.

In terms of non performing loans (NPLs) as a percentage of gross loans, Kenya ranks strongly at about six per cent compared to 18 per cent for Angola, nearly 16 per cent for Tunisia, 11 per cent for Ghana and seven per cent for Egypt and Morocco.

In terms of provisions for losses as a percentage of NPLs, Kenya comes third with just over 60 per cent provided compared to Ghana’s 70 per cent and Egypt’s nearly 100 per cent. Morocco provided for just over 60 per cent.

The key issue facing African banks is rising credit risks related to commodity price correction, currency depreciation and structural issues that limit growth of loans.

The Moody’s report says that commodity price correction is “likely to be unusually deep, long and broad-based”.

It says correction will impact banks through direct loans to industry such as Nigerian banks’ significant exposures to oil and gas sector, government payment arrears and cuts in public investment. It is also likely to adversely affect consumer loans since government and commodity companies are major employers.

Moody’s says that reduced capital flows into emerging markets and lower export revenues will continue to weaken local currencies.

“This will affect banks via two main channels: Unhedged borrowers of dollar-denominated loans – those without dollar-denominated revenues – will face difficulties in servicing their debt obligations. Reported capital ratios will decline as currency depreciation increases risk-weighted assets in local currency,” said Moody’s.