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Absa Kenya profit drops 65pc due to Covid woes

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Absa branch in Nairobi. FILE PHOTO | NMG

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Summary

  • The bank’s profits declined to Sh1.9 billion in the nine months from Sh5.5 billion in a similar period last year after the lender restructured a third of its loans and more than doubled provisions related to defaults.
  • The coronavirus has hit bank profits amid a spike in defaults, setting the stage for lenders to issue profit warnings for an industry that has returned double digits growth in earnings recently.
  • Top banks like Equity and KCB have also reported huge declines in profits as a result of higher provisioning for bad loans.

Absa Bank Kenya’s #ticker:ABSA net tax profits plummeted 65 percent in the nine months to September due to loan default losses in the wake of Covid-19 economic hardships and expected strained business conditions for the rest of the year.

The bank’s profits declined to Sh1.9 billion in the nine months from Sh5.5 billion in a similar period last year after the lender restructured a third of its loans and more than doubled provisions related to defaults.

It set aside Sh7.5 billion in provisions for loan losses in the period, up from Sh3 billion a year earlier, due to the expected impact of the pandemic.

During the nine months it restructured loans worth Sh63 billion or 30 per cent of its advances to cushion customers against the effects of the Covid-19 crisis, which triggered layoffs, job cuts and collapse of businesses.

The lender said management chose to take a huge impairment in light of the higher credit risk due to the economic effects of the pandemic and guided by the IFRS standards.

“Performance was significantly impacted by a 147 per cent growth in impairment as customers struggled to keep up with loan repayments due to the economic effects of the Covid-19 pandemic, and a decisive action by the management to increase provisions in order to best position for future potential credit losses,” said Jeremy Awori, the Absa Bank Kenya managing director.

The lender also reported the conclusion of transition from Barclays to Absa at a cost of Sh1.9 billion as an exceptional item incurred in the transition project year-to-date.

The coronavirus has hit bank profits amid a spike in defaults, setting the stage for lenders to issue profit warnings for an industry that has returned double digits growth in earnings recently.

Industries and other businesses have since cut down on their activities in response to the infectious disease, leading to job cuts and unpaid leave for retained staff as profitable firms move into losses.

This has seen workers who had tapped mortgages and unsecured loans for purchase of goods such as furniture and cars and expenses like school fees default. Unsecured loans are given on the strength of one’s salary.

Firms that had borrowed based on the forecast of cash flows have also been struggling to repay their bank loans.

Absa’s non-performing loans grew to Sh16.7 billion in September from Sh13.5 billion in December.

Top banks like Equity #ticker:EQTY and KCB #ticker:KCB reported huge declines in profits as a result of higher provisioning for bad loans.