Banks earn more in 10 months than full year before Covid-19

Commercial banks made more money in 10 months last year than what they earned in the full year before Covid struck the country, revealing the meteoric recovery of a sector that suspended dividends in 2020 on fears of capital erosion.

The Central Bank of Kenya (CBK) said that lenders earned a cumulative Sh161.9 billion in the 10 months to October 2021, a 64 percent jump above earnings in the corresponding period in 2020.

With two months’ worth of profits for 2021 still to be factored in, banks also managed to beat the previous full-year record for gross profit --Sh159.9 billion -- they earned in 2019.

The fortunes of the lenders have been closely matched with the performance of the general economy, which recovered strongly in 2021 to grow by 7.9 percent in the nine months to September after contracting by 0.3 percent in 2020.

The recovery of trade and business activity helped banks to unlock loan repayments that had either been frozen or renegotiated during the peak of the pandemic. The sector’s ratio of gross non-performing loans (NPLs) to gross loans stood at 13.6 percent in October, coming down from a peak of 14.6 percent in March 2021.

The lenders had reacted to the Covid-period difficulties by going on a capital conservation drive mandated by the central bank, which saw them withdraw payment of dividends for the 2020/2021 financial year.

The dividend cuts came as banks sought to preserve cash amid rising defaults and increased provision for bad debt in the wake of the Covid-19 pandemic restrictions which hurt the performance of key sectors such as tourism, transport, education and manufacturing.

The gradual reopening of the economy last year, culminating in the lifting of the dusk to dawn curfew in October, however, underpinned the economic recovery that lifted the improved performance of the lenders.

Analysts said that the banking sector recovery this year has largely been driven by higher lending to the government, cost savings due to continued digitisation and non-funded income.

“We expect end-year interest income growth to be mainly driven by income from government securities,” said AIB capital in a banking sector note.

“Continued investment in alternative channels will, in the long term, drive improvements in cost to income ratio and increased fees and commission income as the pandemic has pushed customers to embrace cashless payments.”

The resurgence is, however, excluding the private sector in terms of access to new credit, with loan book growth slowing down in the 10 months to October compared to the corresponding period in 2020.

The CBK data shows that banks’ loan books grew by Sh197 billion in the period to Sh3.226 trillion, compared to a growth of Sh211.6 billion in the period between January and October 2020, despite the default risk factor being higher in 2020.

Risk-free lending to the government has on the other hand remained a lucrative revenue generator for banks, helped by the Treasury’s wide budget deficit that will see it borrow a net of Sh616.8 billion from the domestic market in the fiscal year ending June 2022.

For bank shareholders, however, the record profits this year have heralded a return to dividend payouts.

Several listed lenders signalled this by offering a rare interim dividend for the nine months ended September 2021. Previously, those offering interim dividends would pay up in June.