Banks staring at Sh22 billion caps-inspired income haircut

Just when you thought emotions around the Banking (Amendment) Act, 2016 have died down, I’m about to whip them up again. My apologies.

Obviously the Act still continues to top everybody’s mind—from the President to the ordinary borrower. In fact, since its promulgation in mid-September 2016, it has been flipped, rolled, propped, punctured-and even lionised, all in equal measure.

What I want to do now is to highlight its actual impacts on commercial banks’ performance since operationalisation. Looking at banks’ 2016 financial results, I must say that in just three months, the Act literally shredded commercial banks’ income statements.

I’m pretty confident ‘shredded’ is a fair adjective in this context. And I’m referring to commercial bank’s performance in the fourth quarter of 2016.

But before delving into details, I must point out that banks faced strong business headwings in 2016. As if the Banking (Amendment) Act 2016 was not enough, they had to deal with elevated loan non-performance. I mean to be fair, this was (and still is) a systemic issue.

Anyway, let’s move on. So, how did banks fare in the fourth quarter? First, by repricing their loan books from tree-tops to 14 per cent, commercial banks took a total Sh5.7 billion in income haircut on their loan books in the quarter.

The large Tier 1 banks took a Sh3.3 billion haircut—and Equity Bank accounted for 80 per cent of that. The mid-sized Tier 2 and Tier 3 banks took Sh2.6 billion and Sh700 million respectively.

Essentially, combined, commercial banks were losing Sh1.9 billion monthly in the quarter. Tier 1 banks were losing some Sh1.1 billion every month while tier 2 and Tier 3 banks were losing Sh864 million and Sh232 million monthly respectively.

These are quite steep figures—and had profound impacts on the bottom line. Talking of bottom line, fourth quarter industry profit before tax (PBT) declined by a third quarter-on-quarter (nominally, that translates into some Sh13 billion off banks’ PBT). Resultantly, 14 banks reported net loss position in the fourth quarter; 10 of them were the smaller Tier 3 names, while the rest were the mid-sized Tier 2 names.

In fact, Tier 3 banks slipped into a net loss position. I mean, an income haircut of Sh232 million per month is quite elevated for their balance sheet sizes. They just had to capitulate.

That’s the fourth quarter performance review within the context of the Banking (Amendment) Act, 2016.

However, I need to point that the fourth quarter bottom line performance also needs to be looked at in the context of elevations in loan loss provisions.

During the quarter, banks ramped up provisions by an additional Sh3.2 billion. But that withstanding, your fixation should now shift to 2017 performance expectations. Investors are forward-looking, so its only fair. I say prepare for more shredding.

First, I don’t see any likelihood of the Act being repealed in 2017—even through some goodwill has been expressed by policymakers.

Second, on a business-as-usual basis, and contingent on a neutral monetary policy stance, we are looking at around Sh22 billion off banks’ topline in 2017. Don’t call me a doomsayer.

I haven't seen any eye-catching volumisation strategies across board to counter that figure. Add elevation in loan loss provisions into the mix and you get yourself a very impotent investment cocktail for the banking sector. Happy Easter and keep off bank stocks, for now.