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Big banks on the spot over bad loans, profit reporting

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The Central Bank has in market reports stated that the improved quality of bank loans was as a result of more efficient appraisal methods. Banks have also been able to cut on some expenses including staff and stationery with the adoption of technology. Photos/FILE

Kenyan banks have been overstating their profits and under-providing for bad loans by large margins even as public anger rises against the “super profits” they make from their clients, a newly released report says.   

Failure to observe international accounting standards (IAS) has left wide gaps in the financial services market that many banks are using to disproportionately blow up their earnings, says the report by Citi Group. 

The report points to the steady drop in provisions for bad loans in the face of robust lending growth as an example of accounting that runs against best practices.
Ordinarily, provisioning for bad loans tends to reduce bank profits – meaning that a drop in provisioning has the reverse impact of blowing up earnings.

“The six largest banks may be under provisioned by Sh20.8 billion,” says Citi Group.

“We estimate that International Accounting Standards (IAS) 39 adjustments overstated the profits of Equity Bank in 2007, KCB in 2011, Barclays Bank in 2009, Co-operative Bank in 2008 and CFC Stanbic in 2008 by 15, 19, 23, 10 and 23 per cent respectively,” says the report titled “Don’t get caught when the music stops”.

Rule 39 of the IAS speaks to reclassification of government securities held by banks demanding that they be done at market value and not through mere transfers in the books.

Banking executives dismissed the report, terming it biased “because it has authored by an interested party”.

The findings put the sector regulator, the Central Bank of Kenya, under the spotlight – especially over its enforcement of accounting rules.

Njuguna Ndung’u, the Central Bank governor, declined to comment on the findings, saying that such a report needed to be done by a neutral party.

“I cannot comment on this because it will sound defensive but we need a neutral party to make such an analysis,” Prof Ndung’u said.

Richard Etemesi, CEO of Standard Chartered Bank, said: “In my view this is a ridiculous report, very shoddily put together with absolutely no work done to validate preposterous allegations.” He added that the Kenyan banking sector is highly regulated and the figures produced are audited by international firms of auditors and also the CBK.

“Therefore to suggest that the published numbers could be manipulated by banks in any way is bordering on the ridiculous.”

Citi Bank operates in Kenya but is not listed at the Nairobi Securities Exchange unlike the banks analysed in the report.

Last year, the sector posted Sh89.5 billion in pre-tax profits, a 20.5 per cent increase from 2010’s Sh74.3 billion.

This outcome caused public furore that sparked a heated debate in Parliament where MPs made fresh efforts to cap the pricing of bank loans.

Going by Citi Group’s calculations, the banks’ made a total of Sh58.7 billion in profits, nearly a third less than the officially stated figure of Sh89.5 billion.

The profit outlook has, however, been less rosy this year as high interest rates dampened consumer appetite for credit capping industry earnings growth in the first quarter of the year. 

“Sooner or later the challenging macro-economic environment of the past four years will have to reflect on the operating performance of Kenyan banks and this should not be overlooked by the market, in our view,” Citi Group says in the report.

The profit growth has also been helped by a steady growth in the customer base over the past four years from 4.7 million to 15.7 million.

Assets have grown by 112.5 per cent without an impact on profit growth, Citi Group observes.

The asset growth has been partly driven by a doubling of the loan book to Sh1.19 trillion from Sh533 billion four years ago even as associated risk dropped.

Gross non-performing loans declined to Sh52.9 billion by December last year from Sh56.7 billion in 2007 or from 11 per cent of total loans to four per cent.

The report notes that only CFC Stanbic grew its balance sheet provisions materially faster than its gross loans in the past four years. Other big banks grew their loan books materially stronger than they built-up provisions.

The additional provision of Sh20.8 billion that the six large banks require, as per Citi Group analysts, represents 49 per cent of 2011 profits.

“Provisioning for the banking sector may have not been at par with the regulator standards,” said Vimal Parmar Head of Research at Kestrel Capital.

Mr Parmar agreed that bank profits may have been overstated but was cautious on the handling of government securities held by banks stating that it was difficult to tell the price at which the Treasury bonds were bought at.

The Central Bank has in market reports stated that the improved quality of bank loans was as a result of more efficient appraisal methods. Banks have also been able to cut on some expenses including staff and stationery with the adoption of technology.
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