Capital Markets

Banks profit dips 4.9pc in rare decline for industry

The Central Bank of Kenya in Nairobi.

The Central Bank of Kenya in Nairobi.

Banks posted a 4.9 percent decline in pre-tax profit generated from the Kenyan market in the nine months ended September as loan defaults soared to levels last seen 16 years ago.

Latest data from the Central Bank of Kenya (CBK) shows the sector's pre-tax profit in the period dropped to Sh177.8 billion from Sh187 billion a year earlier, marking a rare occurrence for the industry that has generally been enjoying growth in profits.

Read: Banks half-year profits defy tough times to hit Sh156bn

The decline in profit, coming amid the economic hardships that have gripped borrowers in Kenya, is in contrast with a similar period last year when gross earnings rose by 28.5 percent from Sh145.5 billion recorded in the nine months to September 2021.

The top two most profitable lenders in Kenya —Equity Group and KCB Group— saw their profits from the Kenya operations dip in the review period and had to depend on their subsidiaries to support their earnings.

The sector’s decline in profit marks a rarity for the sector that has generally been growing profits. The only recent years in which the industry's profit dipped was in 2017 on the impact of interest rate capping law and in 2020 when Covid-19 pandemic disrupted businesses.

CBK data shows gross non-performing loans (NPLs) —amount of loans on which interest and principal have not been paid for at least three months— hit Sh615.54 billion in September, marking three straight months of increasing defaults.

The Sh615.5 billion defaults against a loan book of Sh4.103 trillion at the end of September means the NPL ratio is at 15 percent—being closer to that of 15.4 percent that the sector posted 16 years ago in June 2007.

The stock of NPLs has risen by Sh127.84 billion or 26.2 percent since January —a development that has spooked banks, forcing them to increase provisioning for loan defaults.

Nine-month unaudited results from top banks have shown an upward trend in the size of money being set aside in anticipation of defaults, eating into the profitability.

Factors such as the elevated price of goods and services, new statutory deductions such as housing levy and increased interest rates in line with a higher Central Bank Rate (CBR) —now at 10.5 percent, the highest point in nearly seven years—have combined to weaken borrowers’ ability to service loans.

The CBK credit survey taken at the end of September shows 45 percent of the banks surveyed by the regulator indicated that NPLs were likely to rise in the fourth quarter ending December. About 34 percent expect it to fall while 21 percent anticipate it to remain constant.

The bankers told the CBK that while they expect NPL levels to remain constant in nine economic sectors but rise in personal and household and trade sectors.

The CBK Monetary Policy Committee (MPC) will meet on Tuesday (December 5) in a meeting that will review the regulator's benchmark rate.

Read: How increasing interest rates set banks for profit windfall

The last upward review of CBR was in June. The committee in October held the rate at 10.5 percent, noting that the impact of the tightening of monetary policy in June to anchor inflationary expectations was still transmitting in the economy.

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