Top banks saved up to Sh27.2 billion in the nine months to September on lower costs of handling defaults as borrowers resumed making payments following months of a freeze.
The eight tier-one lenders reduced their loan loss provisioning costs by up to 39 percent, underlining the supernormal profits posted by most of them.
KCB Bank #ticker:KCB made the biggest savings of Sh10.6 billion followed by Equity Bank #ticker:EQTY which saved Sh9.6 billion. Absa Bank #ticker:ABSA and NCBA #ticker:NCBA each saved Sh4.1 billion and Standard Chartered #ticker:SCBK Sh48 million.
Among the top lenders only Cooperative Bank #ticker:COOP and I&M Bank, which increased provisioning for bad debt by Sh2 billion and Sh735 million respectively, bucked the trend.
Savings from loan loss provisioning propelled banks to triple-digit profit growth with KCB posting 131.1 percent to Sh25.1 billion and Absa Bank Kenya’s net income rising 328.2 percent to Sh8.2 billion.
Equity Group posted a profit after tax of Sh26.8 billion, a 78.6 percent growth while StanChart's net income surged 46.6 percent to Sh6.3 billion.
The cut in loan loss provision reflects the gradual resumption in debt repayment after the CBK lifted the one-year freeze on loan principal, interest and term extension that saw borrowers restructure Sh1.7 trillion debt.
CBK statements show that during this period, non-performing loan (NPL) ratios have consistently fallen from 14.5 percent in February to 13.9 percent in August and 13.6 percent in October.
“Banks have posted an accounting profit from retiring losses. We do not see much business in the balance sheet, with private sector loan growth at 7.4 percent this year down from 8.1 percent last year,” said George Bodo, an analyst at Genghis Capital.
Banks had taken a conservative approach last year and set aside billions of shillings. Loan loss provisions rose 45.8 percent as banks sought to cover themselves against the deteriorated asset quality during the year.
Now with the huge war chest to back up bad loans, banks have cleared their legacy problems and can now rake in more profits from increased lending while pursuing defaulters.
A look at the leading banks’ third-quarter financials shows the spike in lenders' profits is being driven by reduced costs rather than more lending, especially the cost of insurance for bad loans.
Banks with outsize profits have lowered their provisioning levels, reflecting the improved operating environment compared to a similar period last year.
Kenya’s economy expanded 10.1 percent in the second quarter of the year on the back of a rebound in economic activity compared with a similar period last year when tough Covid-19 containment measures led to a 4.7 percent contraction.
Going forward, however, lenders will also need to find a new strategy for growth that may force them to lend back to the economy.
Banks are hoping that they can resume lending on the confidence of public and private credit guarantee schemes for small businesses and that increased enforcement of loan recovery will bring back value from their huge non-performing loan portfolio.
Many businesses, including aluminium products maker Kaluworks limited, biscuits manufacturer Britania Foods, and retailers Nakumatt and Tuskys, have been placed under administration or are being liquidated by lenders while property auctions have spiked.
Analysts, however, warn that the banks’ optimism is not reflective of the continued Covid-19 threat of new variants and political tension in the run-up to next year’s General Election.
“Banks are projecting a healthy loan book with the cuts in provisions yet the worst is not over yet with Covid-19 overhung and next year being an election year,” Mr Bodo said.
Kenya’s economy has a history of slowing down during election years when firms put investment decisions on hold pending a return to normalcy in the political landscape.
Economic growth, for example, slowed down to 4.81 percent in 2017 as a result of the bitterly contested presidential poll from 5.88 percent a year earlier.
The same trend was seen in 2008 when the aftermath of the deadly December 2007 presidential election sank the economy to growth to 0.23 percent from 6.865 percent the year before.
The notable exception was in 2013 when the economy grew 5.8 percent after the Supreme Court amicably resolved a presidential dispute compared with 4.56 percent the year before.