Real estate slowdown leaves banks with rising pile of bad loans
A housing estate: The real estate sector recorded the highest increase in NPLs over the quarter by Sh5.9 billion or 42.3 per cent. PHOTO | FILE
What you need to know:
Gross non-performing loans (NPLs) rose 15.8 per cent to Sh170.6 billion in March compared to Sh147.3 billion in December.
The building boom has been driven by insurers, investment firms and wealthy individuals, some of whom have taken large loans to undertake multi-billion-shilling projects in the major towns.
Besides a turbulent labour market and tapering demand for new housing units, the spike in bad debts was also driven by a general slowdown in activity in other economic sectors, including trade and manufacturing.
For banks, growth of NPLs means profitability will depend on how well individual institutions can control their overall costs amid pressure to boost their loan loss provisions in a move that will weigh down their bottom-line.
Kenyan banks reported a steady rise in the pile of bad debts in the first three months of the year saddled by a slowdown in the real estate sector and increased retrenchment of formal sector workers, according to newly-released official data.
Gross non-performing loans (NPLs) rose 15.8 per cent to Sh170.6 billion in March compared to Sh147.3 billion in December, the Central Bank of Kenya (CBK) says in its first quarter industry report.
“Real estate sector recorded the highest increase in NPLs over the quarter by Sh5.9 billion or 42.3 per cent. This is attributable to slow uptake of housing units,” the CBK report says, adding that the pile of bad loans in the personal/household sector increased by Sh5.7 billion or 21.5 per cent between December 2015 and March 2016 “as a result of negative macroeconomic drivers such as job losses and delayed salaries.”
Besides a turbulent labour market and tapering demand for new housing units, the spike in bad debts was also driven by a general slowdown in activity in other economic sectors, including trade and manufacturing.
A growing stock of bad loans means banks’ profit margins will be squeezed in the short term saddled by a corresponding increase in loan loss provisions to absorb potential losses in their balance sheets.
The 42.3 per cent rise in the property market’s NPLs to Sh19.7 billion indicates that developers have satisfied a large part of the pent-up demand for commercial and residential housing.
The real estate boom that has been under way for more than a decade has attracted major investments, with Nairobi alone approving more than 250 buildings plans valued in excess of Sh18 billion each month.
The building boom has been driven by insurers, investment firms and wealthy individuals, some of whom have taken large loans to undertake multi-billion-shilling projects in the major towns.
A slowdown in the property market risks to specifically hurt lenders with a huge exposure to the industry.
HF Group, one of the biggest financiers of the real estate sector, says it derives most of its earnings from that industry through provision of mortgages and project finance.
The lender’s gross bad debts rose to Sh4.5 billion in March from Sh4 billion in December, mirroring the growth of doubtful loans across the banking sector.
Meanwhile, financial institutions with a large presence in retail banking – including KCB Group and Equity Group — are expected to bear the brunt of ongoing retrenchment in corporate Kenya.
Last Friday, national carrier Kenya Airways announced that it had started its long-awaited retrenchment plan with 80 employees, highlighting the rising risk of unsecured lending to salaried individuals.
KQ, as the airline is popularly known, has also been delaying salaries of its employees, a development that has put many at loggerheads with lenders.
Formal sector workers typically borrow to fund consumption or acquire personal assets, including cars and houses and rely on their jobs to repay the loans.
Some of the retrenched workers have defaulted on their loans, leading to auctioning of their assets.
Banks with large distribution networks like Equity and KCB account for most of the retail lending business, which is expected to have contributed to their stock of bad debts in the review period.
KCB, for instance, saw its gross NPLs rise to Sh30.4 billion in March compared to Sh23.4 billion in December while that of Equity increased to Sh10.9 billion from Sh9 billion over the same period.
The two banks are, however, well diversified by customer base, with their aggregate bad loans incorporating defaults by businesses, large and small.
The CBK report shows that lenders are also suffering from defaults in other sectors, including trade and manufacturing, indicating a significant business slowdown even as macroeconomic numbers show the economy continues to expand.
Bad debts from the trade sector, for instance, jumped nine per cent to Sh50.6 billion in the period while NPLs by manufacturers increased 15.5 per cent to Sh19.8 billion.
“The manufacturing sector had an increase in NPLs … due to slowdown in business, leading to failure to generate enough cash flows to meet all financial obligations,” reads part of the report.
While most sectors registered distress in terms of cash flows and loans repayments, the overall economy expanded 5.9 per cent in the first quarter of the year compared to five per cent the year before.
The Kenya National Bureau of Statistics (KNBS) attributed the GDP performance to growth in all sectors of the economy, indicating that the rising bad debts are not indicative of a wider economic malaise.
Agriculture, for instance, registered a 10.7 per cent drop in NPLs to Sh7.5 billion in what the report attributed to improved weather conditions.
Transport and communications also recorded a 31.1 per cent decline in bad debts to Sh12.3 billion as improved infrastructure and road safety rules strengthened the financial position of firms in that industry.
For banks, the growth of NPLs means profitability will depend on how well individual institutions can control their overall costs amid pressure to boost their loan loss provisions in a move that will weigh down their bottom-line.
The industry’s asset quality, as measured by the ratio of net non-performing loans to gross loans, deteriorated to four per cent in March from 3.4 per cent in December.
This saw ratio of specific provisions to total NPLs drop to 36.3 per cent from 40.9 per cent despite the provisions holding steady at Sh50 billion.
The report says the banking industry’s pre-tax profit rose 51.5 per cent to Sh25.5 billion from Sh38.4 billion in the period, largely through cost-cutting measures.
“The growth in profitability is mainly attributable to a higher decrease in total expenses by 8.5 per cent as compared to a decrease in total income of 2.7 per cent in the quarter ended March 2016,” reads part of the report.
Individual banks have posted mixed results ranging from losses, profit drops and earnings growth as most of them navigated a pile-up of bad debts.
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