KCB reports Sh19bn profit despite Sh6bn South Sudan hit

Kenya’s biggest bank by assets KCB on Tuesday announced a 16.4 per cent increase in its profits to Sh19.6 billion, even as it booked a Sh6.1 billion foreign exchange loss, mainly from its South Sudan operations where the national currency has been devalued by more than 100 per cent since December.

KCB’s forex losses are expected to mirror that of other Kenyan multinational banks to varying degrees – but are mainly driven by the recent routing of the South Sudanese Pound (SSP).

NIC Bank, which has subsidiaries in Uganda and Tanzania, also booked a Sh316.4 million forex loss in the conversion of the foreign units into local currency.

The forex losses could lead to material deterioration of shareholder wealth if the currencies fail to bounce back in the near term.

The Nairobi Securities Exchange-listed firm’s currency losses, captured by translating its subsidiaries’ financial statements into Kenya shillings, saw the bank’s comprehensive income drop by a third to Sh11.7 billion in the year ended December compared to Sh17.6 billion the year before.

The currency hit has seen KCB cut its cash dividend payout and to issue new shares as part of a cash-and-stock payout to shareholders. The company has declared a dividend of Sh2 per share, same as for the previous period.

The new dividend, expected to be paid on July 22, will, however, come in two forms. There will be a cash dividend and a separate one in the form of new KCB shares, whose exact number is expected to be disclosed later.

Payment of part of the dividend through issuance of new shares, in a process technically known as scrip dividend, is seen as helping the bank to preserve cash.

KCB’s profit growth was aided by increased interest income from the mainstay lending business.

Total interest income expanded 18.7 per cent to Sh56.3 billion, with the loan book rising 21.9 per cent to Sh345.9 billion.

Nearly 90 per cent of KCB’s currency losses came in the three months to December, underlining the impact of the SSP devaluation. The currency traded at an official fixed rate or 2.96 units to the dollar when the government decided to let it float in December, leaving it to the forces of demand and supply.

The SSP is currently trading at about 6.1 units to the dollar, representing a depreciation of more than 100 per cent.

The depreciation has marked down South Sudan assets in terms of the Kenya Shilling and other currencies, causing firms like KCB to book the losses.

READ: EABL shuts down South Sudan depot after currency losses

A unit of the SSP was equivalent to 30.5 units of the Kenya Shilling in December 2014 but its value has collapsed to buy only 3.7 units of the local currency, representing 87 per cent depreciation.

KCB says it translates the assets and liabilities of its foreign subsidiaries into Kenya shillings at the end of each December, the reporting date.

“Exchange differences arising on translation are recognised in other comprehensive income and accumulated in equity in the translation reserve,” the bank says in its accounting policies.

South Sudan let its currency float after finding it difficult to support the fixed exchange rate system owing to inadequate foreign exchange reserves.

The global oil price crash and civil war have hurt dollar inflows, with the country recording net oil revenues of $1.7 billion (Sh173 billion) last year.

South Sudan is the most important market for KCB outside Kenya, holding six per cent of its Sh558 billion total assets as of December 2015.

KCB was the first local bank to venture into South Sudan in 2006 where it now has about 20 branches spread across 10 states in the country that has been the most profitable market outside Kenya for local banking multinationals.

The political instability and the economic challenges, however, threaten to dampen its future prospects.

The SSP devaluation has sparked labour unrest, with the workers of KCB and Equity Group having gone on strike demanding a large pay rise to protect them from the ensuing inflation.

The year-on-year rate of inflation in the country stood at 165 per cent in January, according to the South Sudan National Bureau of Statistics.

The rising cost of living is expected to force employers, including the government and private firms, to raise salaries in a move expected to significantly raise their operating costs.

South Sudan’s finance minister, David Deng, in December announced that the government would increase the salary of civil servants to help them absorb the impact of the currency devaluation, according to media reports.

Fees, commissions from forex trading and other non-lending activities have been a major driver of profitability for banks in South Sudan.
The country relies heavily on imports, creating a huge demand for forex dealers led by the banks.

While the devaluation is causing labour unrest and forex losses for multinationals, the decision is expected to improve South Sudan’s economy in the long term by boosting oil revenues and aid inflows in local currency terms.

A flexible exchange rate system is also expected to boost trade by reducing dollar shortages that previously made the black market thrive.