Kenyan banks make Sh71bn profits in 6 months

Kenyan banks are on course to delivering super profits this year having posted double digits growth in the first six months and staying far ahead of the projected rate of the economy’s performance.

The latest data from the Central Bank of Kenya (CBK) shows that the lenders’ pre-tax profits grew by 15.6 per cent in the first six months of the year, beating last year’s 15.5 per cent growth by a thin margin.

Total industry profits rose to Sh71.03 billion at the end of June 2014 compared to Sh61.47 billion the previous year — helped by higher earnings in the second quarter of the year.

Second quarter pre-tax profits rose to Sh37.61 billion from Sh33.42 billion in the first quarter of the year, according to the CBK’s banking report.

Interest income accounted for nearly two thirds of the profits even as the loan book grew by only five per cent, pointing to the central role that high interest rate spreads are playing in driving the profits machine.

“Interest on loans and advances, fees and commissions and government securities were the major sources of income (in quarter two) accounting for 58.5 per cent, 19.4 percent and 15.1 per cent of total income respectively,” the report says.

Interest on deposits, staff costs and other expenses accounted for 32.7 per cent, 28.4 per cent and 24.3 per cent of the total expenses respectively.

The lenders’ total income increased by 9.4 per cent to Sh104.0 billion in the second quarter, slightly ahead of total expenses that grew by 8.3 per cent to Sh66.56 billion in the three months to June.

READ: High appetite for loans gives banks 12.5pc profit growth in five months

At 15.6 per cent, the profitability of Kenyan banks is more than triple the rate of projected economic growth which the World Bank downgraded to 4.7 per cent early this month, citing the many challenges including drought, insecurity, fiscal expansion and implementation of devolution.

The performance of the banking sector is also far ahead of key sectors of the economy such as manufacturing, tourism and agriculture.

But analysts said this is not unique because the financial services sector — which is the provider of the money that is invested in the productive sectors — should ordinarily stay ahead.

“Banks have continued to enjoy the same interest rates they agreed for past loans. This is an income stream that remains quite steady regardless of the performance of the borrowing entities hence the stready earnings stream,” said Burbidge Capital head of research Vimal Parmar.

The interest rate spread — the margin between the deposit and lending rate — remains at an average of 10 per cent and has become a major battleground in the ongoing public debate on the high cost of loans.

Banks argue that the high cost of funds has made it difficult for them to bring down lending rates but critics argue that it is not the floor but the margins that hurts the borrowers most.

The battle over the high cost of money has seen the government launch yet another instrument — the Kenya Bankers Reference Rate (KBRR) —aiming to shed light into the dark room of loans pricing.

ABC Capital corporate finance manager Johnson Nderi said rising profitability of banks is also partly the result of improved risk management that has come with credit rating of borrowers, shielding them from being hit by sudden economic shocks.

ALSO READ: Banks tap thirst for big loans to grow their profits

The CBK’s figures are supported by high-level half-year profits growth by lenders that have so far published their results. NIC Bank, a middle-tier lender, has reported a 9.1 per cent increase in net profit to Sh2.04 billion.

The country’s two biggest bank by customer base Equity and Barclays are expected to publish results this morning while the biggest bank by assets KCB will announce its results Thursday.

Industry data, however, shows that the volume of non-performing loans rose 6.9 per cent and crossed the Sh100 billion mark in the second quarter, driven by rising difficulties in the trading sector.

Gross non-performing loans (NPLs) increased from Sh95.1 billion in March to Sh101.7 billion in June, nearly replicating the margin of loan book growth.

The industry’s gross loans and advances rose 5.3 per cent in the second quarter of the year to Sh1.78 trillion, meaning that the ratio of gross NPLs to gross loans increased only marginally from 5.6 per cent to 5.7 per cent during the same period.

“The rise in NPLs is indicative of a slowdown in both the export and import businesses — in terms of uptake of imports locally and demand for exports in external markets, especially considering that interest rates have stayed relatively stable,” said Standard Investment bank head of research Francis Mwangi.

CBK data shows that eight out of 11 sectors registered an increase in NPLs in the second quarter of the year. The financial services sector regulator says that this was mainly due to spill-over effects of high lending interest rates and challenges in the business environment.

Traders increased their share of NPLs by 14 per cent to Sh26.9 billion, while household and personal loan borrowers accounted for Sh23.9 billion or four per cent higher than the first quarter total Sh22.9 billion.

NPLs pile for the real estate sector rose 12 per cent to Sh12.1 billion, while the manufacturing sector’s NPLs rose 10 per cent to Sh10.9 billion.

Only the agriculture and mining sectors recorded a decline in NPLs, by 13 per cent and 14 per cent and to Sh5.2 billion and Sh0.6 billion respectively.

The increase in NPLs came on the back of the rising cost of living. Inflation rose to an eight-month high of 7.39 per cent in June, eating into consumer budgets.

The banks expect continued rise in NPLs from trade, tourism, transport and personal/household sectors, the CBK report says, citing heightened political activity, insecurity and the rising cost of living.

Mr Mwangi, however, said that while looking at the absolute increase in the non-performing loan book is necessary, it is equally important to consider the ratio of non-performing loans to the total loan book.

The ratio of NPLs to gross loan book stood at 16 per cent 10 years ago but has since dropped to 5.7 per cent, indicating that growth in gross loans has far outpaced that of NPLs.