Kenyan banks lose Sh12.7bn in South Sudan currency hit

The total exposure of Kenyan banks to the recent devaluation of the South Sudanese Pound (SSP) Tuesday hit Sh12.7 billion after Kenya’s second-largest lender Equity announced that it had suffered a Sh5.7 billion forex loss, mainly from its South Sudan subsidiary.

The losses are expected to rise further when Co-op Bank, another Kenyan lender with operations in South Sudan, announces its results for the year ended December 2015.

South Sudan has devalued its currency by more than 100 per cent since December last year, marking down the assets of Kenyan banks in the country that is also experiencing runaway inflation and labour unrest.

KCB last week reported the largest currency loss so far of Sh6.1 billion, while CfC Stanbic Holdings lost Sh1 billion in the neighbouring country.

The losses have seen comprehensive incomes of the banks fall by double digits though they are yet to affect net profits.

Analysts said the losses could crystalise if the companies choose to sell part or all of their assets in South Sudan in the future, with the amounts reported showing the extent of potential exposure.

“The devaluation has reduced the value of assets in South Sudan and also generated potential losses through foreign exchange translation to Kenya shillings,” said Vimal Parmar, an analyst at Burbidge Capital, even as he urged investors to focus on the total impact of the devaluations on the group because that is the level at which they have invested.

READ: KCB reports Sh19bn profit despite Sh6bn South Sudan hit

Equity, for instance, said the SSP devaluation reduced the value of its South Sudan assets from Sh54.2 billion in September to Sh19.4 billion in December.

The bank, however, reported lower forex translation losses because the SSP debasement has also minimised liabilities for multinational companies in that market as measured in Kenya shillings.

It remains to be seen what long-term impact the currency’s fall will have on Kenyan banks operating in that market and whose normal earnings grew by double digits or remained flat in the year ended December.

Equity’s net profit in the period remained flat at Sh17.3 billion as higher interest and operating expenses pinned down earnings. The lender declared a dividend of Sh2 per share, raising it from the previous year’s Sh1.8 per share.

While net profits stagnated, the bank’s comprehensive income dropped 41.2 per cent to Sh10.4 billion as a result of the Sh5.7 billion forex losses recorded in translating financial statements of the South Sudan subsidiary into Kenya shillings.

READ: Equity Bank lifts dividend despite flat profit growth

Equity’s interest income jumped 22.8 per cent to Sh43.4 billion, reflecting the loan book expansion by a margin of 26 per cent to Sh269.8 billion.

The bank’s interest expenses rose 50.6 per cent to Sh9.3 billion, saddled by higher interest rates and a Sh56.7 billion rise in customer deposits to Sh302.1 billion.

Non-interest income, including fees on transactions, rose 18.7 per cent to Sh21.9 billion. Operating expenses grew 21.8 per cent to Sh32.1 billion.

Rival KCB’s comprehensive income also dropped by a third to Sh11.7 billion in the review period compared to Sh17.6 billion the year before.

The bank’s net profit, which does not factor in the forex losses, however, jumped 16.4 per cent to Sh19.6 billion in the same period.

The currency hit has seen KCB cut its cash dividend payout, opting 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 the previous period. The new dividend, expected to be paid on July 22, will, however, come in two forms. 

Besides the SSP, other East African currencies also declined significantly and contributed to the currency losses reported by Kenyan banking multinationals.

NIC Bank, which has subsidiaries in Uganda and Tanzania, for instance booked a Sh316.4 million forex loss from translating the foreign units into local currency.

But South Sudan’s currency has had the biggest depreciation that will be difficult to reverse in the context of the country’s economic woes and persistent political instability.

The currency traded at an official fixed rate of 2.96 units to the US 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.

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 five units of the local currency, representing a 83 per cent drop.

South Sudan let its currency float as the cost of supporting the fixed exchange rate rose significantly with the erosion of its foreign exchange reserves.

The global oil price crash and the civil war have hurt dollar inflows to the world’s youngest nation, leaving it with net oil revenues of $1.7 billion (Sh173 billion) last year.

South Sudan had become one of the most important markets for KCB and Equity outside Kenya, holding Sh33 billion and Sh19.5 billion of their assets respectively 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. South Sudan had become the most profitable market outside Kenya for local banks.

Equity followed in 2009 and now has about 10 branches in major towns of South Sudan.

The political instability and the economic challenges have, however, dampened the country’s economic prospects, sparked labour unrest and driven high level inflation.