Banks tap thirst for big loans to grow their profits

Traders and ordinary Kenyans increased their uptake of loans in the first three months of the year, powering banks to make Sh5.2 billion more than they earned during the same period last year.

Total industry lending increased to Sh1.69 trillion in the first three months of the year from Sh1.6 trillion last December, a 5.6 per cent growth.

At least 69 per cent of credit officers surveyed by CBK said the growth was driven by increased trade financing.

At least 59 per cent of the respondents said personal loans were a major growth driver during the period that was characterised by relative interest rate and exchange rate stability.

That enabled the banks to make a massive Sh33.4 billion in pre-tax profits compared to the Sh28.2 billion they made last year -- an 18.4 per cent increase.

The performance has been behind the recent rallying of bank stocks at the Nairobi Securities Exchange (NSE), which analysts expect to continue attracting investor attention in the coming months.

Bank stock prices rose by between six and 54 per cent in the first four months of the year led by top tier players such as KCB, Equity, Co-op and CfC Stanbic, whose stocks are currently valued at 25 per cent more than they were at the beginning of the year.

Analysts expect the growth in the uptake of loans to continue if the current macroeconomic environment is sustained.

“If the cost of loans remains stable and economic activity continues at the same pace, bank profits will probably grow by at least 18 per cent for the year,” said Vimal Parmar, the head of research at Burbidge Capital, an investment advisory firm.

A steep rise in interest rates and a deterioration of economic conditions could, however, have the reverse effect of slowing down growth in the uptake of loans and an increase in loan defaults. Mr Parmar warns that this could slow down or even reverse growth.

“Danger lies in the significant increase in the volume of non-performing loans in the first quarter of the year, signalling a possible increase in provisioning for bad loans that might negatively affect the lenders’ profitability in the long term,” he said.

Robust first quarter growth saw total banking sector assets rise to Sh2.82 trillion in March from Sh2.73 trillion in the same month last year.

Kenya’s lending market has stayed comparatively stable since mid-last year when average lending rates fell from more than 20 per cent in 2011 and 12 to 17 per cent currently.

READ: High cost of loans sets banks on path to profit record

Pressure has, however, been mounting on the Central Bank to get the cost of borrowing even lower to spur consumption to a level that can drive economic growth.

Some banking sector analysts expect expansion of credit to the real estate sector and to individuals to be the key determinants of the lenders’ full year performance.

The credit officers that CBK surveyed said increased recoveries of what had been previously classified as bad debt in key sectors such as agriculture, building, trade, transport, real estate and households had helped drive growth in the first three months of the year.

“Most banks intend to intensify recovery efforts in six sectors to improve the overall quality of their asset portfolio while maintaining recovery efforts in the other five economic sectors,” said the credit officers said.

The CBK survey shows that demand for credit was most robust in the trade, building and construction, and personal or household loans but weakest in energy and water, tourism as well as in manufacturing.

The CBK attributes the reported rise in credit demand to cost stability and the increase in investment opportunities.

Kenya’s tourism sector has been facing a major slump after its earnings fell by 2.1 per cent in 2013 to Sh96.6 billion.

The hotel and restaurants sector, in particular, registered a 4.5 per cent contraction in 2013 -- the largest in any sector since 2009 when the mining sector contracted by 4.5 per cent.

Fears of bad debt may also explain why the banks intensified collection of debt from the tourism sector.

Credit officers expect the volume of nonperforming loans (NPLs) to remain constant, except for a few sectors such as agriculture, tourism and real estate.

The CBK says credit standards largely remained unchanged across most economic sectors in the first quarter of the year save for the slight tightening for the tourism sector.

The survey found that varied expectations on the trend of economic activity forced 31 per cent of the banks to ease their credit standards while another 14 per cent tightened.