Rising pile of bad debt raises red flag on health of banks

Kenyan banks significantly increased their provisioning for bad loans in 2015 in a move that has surprised the market and raised questions about the quality of oversight that the Central Bank of Kenya (CBK) provided under the leadership of Njuguna Ndung’u.

Standard Chartered, Chase Bank, National Bank and Bank of Africa are some of the lenders that more than doubled their provisions for non-performing loans (NPLs) between 2014 and 2015, coinciding with the regime change at the CBK that brought in the hawk-eyed Patrick Njoroge as governor.

The lenders have also recorded a steep rise in NPLs, signalling the effect that tougher economic times has had on the pockets of borrowers.

A number of international institutions, including the International Monetary Fund, ratings agency Moody’s and Citigroup’s investment banking arm, warned that the lenders would take a hit by increased provisioning for bad loans as the CBK heightened its scrutiny of their books.

Analysts said most banks had been hit by increased regulatory surveillance in the wake of last year’s collapse of two lenders in a row.

“After the Imperial Bank and Dubai Bank crisis late last year, the regulator has become stricter in interrogating how the banks report their books,” said Burbidge Capital head of research Vimal Parmar, insisting that stricter supervision remained the key determinant of the lenders’ performance.

“It also has an economic angle because the steep rise in interest rates during the last quarter of 2015 should have been expected to affect NPLs depending on who the banks lend to.”

READ: CBK seeks further probe before giving direction on fate of Imperial Bank

Underprovisioning for bad loans may help banks report better profits, but in the event that a large number of borrowers fail to meet their obligations, it exposes the lenders to financial difficulties and even possible collapse.

Bank of Africa, a third-tier lender, for instance, increased its loan loss provisions fivefold to Sh2.1 billion between 2014 and 2015 as gross non-performing loans quadrupled to Sh9.7 billion from Sh2.4 billion.

The bank said 15 large customers accounted for more than half of the bad debts and reported a net loss of Sh1.02 billion compared to a net profit of Sh144 million in 2014.

StanChart, whose net earnings dropped by 39 per cent to Sh6.3 billion, increased its bad loans provision threefold from Sh1.3 billion to Sh4.9 billion after its bad loans book grew from Sh10.75 billion to Sh14.69 billion. 

Chase Bank increased its provisions by similar margins to Sh2.17 billion from Sh794 million a year earlier following the tripling of bad loans to Sh11.87 billion from Sh3.41 billion in 2014.

National Bank’s drop to the loss-making territory from a Sh870.7 million profit in 2014 came on the back of a massive increase in loan loss provisions from Sh525.3 million to Sh3.72 billion and a 63 per cent rise in NPLs to Sh11.76 billion.

READ: CMA on the spot as NBK reports Sh1.2bn loss

The CBK’S prudential guidelines classify loans into five categories, namely ‘normal’, ‘watch’, ‘substandard’, ‘doubtful’ and ‘loss’ — according to the probability of the loan being recovered from the borrower.

Those classified as ‘sub-standard’, ‘doubtful’ and ‘loss’ are considered as NPLs. Sub-standard loans, whose payment has lapsed more than 90 days but less than 180 days, are supposed to be provided for at the rate of not less than 20 per cent.

Doubtful and loss loans — those lapsing for six months or more — are required to be 100 per cent covered under the guidelines.

The advent of stricter supervision has, however, coincided with some tough economic conditions that saw lending rates rise significantly on the back of a biting government cash crunch late last year.

Standard Investment Bank head of research Francis Mwangi said that this would account for the increase in NPLs across the industry.

Mr Mwangi said that previously the lenders were not providing enough cover for NPLs — with the coverage ratio standing at below 50 per cent — and may now be forced to cover for past ground by the combination of economic reality and pressure from the regulator.

“Once we calculate the coverage ratio for the industry for 2015 (loan loss provisions divided by non-performing loans) and see whether it has gone up we will be able to tell whether the provisioning has only gone up because of the rise in NPLs or it is because of the regulator’s tightening of the screws,” he said.

Job creation

Yesterday, the World Bank said Kenya’s economy is not creating enough jobs despite doing better than most African economies. This is mainly because most of the jobs created are in the informal sector and are therefore of low productivity.

The World Bank said such a situation has resulted in a large section of Kenyans missing out on the benefits of economic growth, which is expected to hit six per cent in the next two years.

The CBK said in the latest banking credit survey that 46 per cent of banks expect NPLs to rise in the current quarter, 22 per cent expect the NPLs to remain unchanged while 32 per cent feel the NPLs level will decrease.

“The expected increase in NPLs in quarter one of 2016 may be attributed to various factors, including the perceived poor business environment, low liquidity in the economy, high interest rates/residual effect of the interest rise in the previous year and government cash flow constraints,” said the CBK.

“Other respondents cited high cost of funds resulting in higher financing costs coupled with a slump in economic activity which may hamper performance of companies.”

Besides, 2015 was a difficult year that saw a record 19 listed firms across all sectors issue profit warnings — constraining their loan repayment capability — a development that often trickles down to their suppliers and business associates.

The Kenya Revenue Authority also missed its half-year tax collection target by a significant Sh47.6 billion after realising Sh687 billion with just four months to the end of the fiscal year, indicating the tighter financial environment businesses and individuals went through.

Of the deficit, Sh26 billion is in Pay-As-You-Earn (PAYE) revenue and Sh15.9 billion in Value Added Tax collection from imports.