Full capital headache for banks

A customer is served at the Kenya Commercial Bank (KCB) in Nairobi on January 24, 2018. PHOTO | SIMON MAINA | AFP

Commercial banks are entering the final quarter in which they are allowed a waiver from higher capital requirements under a more conservative accounting standard that was introduced in 2018.

A number of lenders ended last year in breach of some of the capital adequacy ratios that are used to measure the health of banks— core capital to total risk-weighted assets, total capital to total risk-weighted assets, and core capital to total deposits.

The adoption of the International Financial Reporting Standards 9 (IFRS 9) on January 1, 2018, required banks to provide for expected loan losses rather than those already incurred, reducing their profitability and eroding their capital base.

The Central Bank of Kenya (CBK) allowed banks to add credit loss provisions back to the capital for performing loans as of December 31, 2017, and those issued in 2018.

This recalculation of capital is to last for five years and has bought lenders time to bolster their balance sheets, which spared weaker ones from having to immediately raise new funds to comply.

Immediate implementation would have resulted in an estimated capital deficit of Sh20 billion across the industry, which would have weakened their capital adequacy levels.

The last audited banking sector results, covering the 12 months to December 2021, show that some lenders are still below the statutory minimum for the three ratios, pointing to a need to have raised new capital by the end of this year.

Banks are required to maintain a floor of 10.5 percent for core capital to total risk-weighted assets ratio, 14.5 percent for total capital to total risk-weighted assets, and eight percent for the core capital to total deposits ratio.

“Five commercial banks were in violation of Section 18 of the Banking Act and CBK Prudential Guideline on Capital Adequacy due to failure to meet the minimum statutory required ratio for total capital to total risk-weighted assets of 14.5 percent,” said CBK in its bank supervision annual report for 2021.

“Four banks failed to meet the statutory minimum required ratio for core capital to total risk-weighted assets of 10.5 percent. While three banks failed to meet the statutory minimum required ratio for core capital to deposit ratio of 8 percent.”

Troubled State-owned lenders Consolidated Bank of Kenya and Spire Bank have the most ground to cover in terms of achieving the minimum capital ratios, owing to accumulated losses.

By the end of last year, Mwalimu Sacco-owned Spire Bank was negative on all three ratios and has been operating under the forbearance of the CBK as it seeks a buyer.

Consolidated, which has had to rely on capital injections from the National Treasury in the past to achieve minimum capital levels, had its ratios between 3.3 percent and 5.8 percent by the end of last year.

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Note: The results are not exact but very close to the actual.