Kenya’s largest banks reduced their allowance or buffers for expected credit losses, despite the level of loan defaults in the country hitting a near two-decade high of 16.3 percent as at June 2024.
The slowdown in provisions by most banks helped extend the industry’s profitability in the first six months of the year, by limiting the lender’s operating costs in the period.
The Kenyan operations of listed banks for instance saw a Sh564 million reduction in loan loss provision in the six months ended June 2024 to Sh34.3 billion, from Sh34.9 billion a year earlier.
This was despite the banks' gross non-performing loans (NPLs) rising by Sh64.2 billion to Sh545.9 billion.
NCBA Bank Kenya marked the largest drop in provisioning costs which nearly halved to Sh2.4 billion from Sh4.1 billion. The bank attributed the reduced costs on expected defaults to major recoveries from its largest clients, with its gross NPLs falling slightly to Sh37.4 billion from Sh38.3 billion.
Standard Chartered Bank Kenya reduced its provisions by Sh474 million to Sh1.5 billion, from Sh2 billion supported largely by a dip in gross NPLs in the period to Sh13.5 billion from Sh23.7 billion in June 2023.
Stanbic Bank Kenya and I&M meanwhile cut their provisioning costs by Sh200 million each, despite seeing a marginal increase in their gross defaults to Sh24.3 billion and Sh28.8 billion respectively, from Sh23.7 billion and Sh28.2 billion.
The National Bank of Kenya (NBK) also trimmed provisions by Sh91 million, despite a deterioration in asset quality with its gross NPLs hitting Sh25.6 billion from Sh23.4 billion.
Equity Bank Kenya, Kenya Commercial Bank (KCB) Kenya, Co-operative Bank of Kenya and Kingdom, DTB and HF Group meanwhile all raised their provisions levels while Absa Bank Kenya held its impairment costs unchanged in the six-months cycle.
KCB Bank Kenya increased its provisions to Sh9.2 billion from Sh7.9 billion, but noted the raised cover was modest given the Group’s actions to lift the buffers previously.
The bank additionally highlighted the role played by a stronger Kenyan Shilling in driving down the valuation of loan defaults denominated in foreign currency.
“We have front-loaded our expected credit losses coverage by 20 percent to close at just over Sh12 billion in the first half of the year, which has helped us improve our coverage ratio. The ratio has been flat due to prudent provisioning in previous years, shielded by the appreciation of the Kenyan Shilling,” noted KCB Group chief finance officer Lawrence Kimathi.
The lender’s coverage of NPLs has been boosted further by leveraging guaranteed facilities and the use of collateral as extra provisions.
Absa Bank Kenya on its part has seen its provision costs remain flat at Sh5.1 billion, boosted in part by major recoveries from its wholesale clients even as the lender sees higher impairments’ from its retail customers.
“We are seeing nearly the same level of impairment at Sh5.1 billion but there has been a lot of movement, a big component being recoveries made in wholesale even as the retail portfolio quality deteriorates from the tough environment which has affected our customers,” notes Absa chief finance officer Yusuf Omari.
The rise of NPLs in the banking industry is largely attributable to the impact of high interest rates, which have impacted consumers by increasing their debt service costs.
The slowdown in private sector lending has equally impacted the dud loans as lower value disbursements fail to dilute existing defaults.
The gross NPLs ratio deteriorated to an 18-year high of 16.3 percent in June from a 2.5 increase in defaults in the second quarter and a one percent decline in gross loans.
The Central Bank of Kenya (CBK) expects banks to continue providing for expected credit losses, ensuring stability of the sector while meeting both regulatory and accounting thresholds of coverage.
“Most banks have adopted a tight credit risk appraisal, ensuring that facilities are well secured and that alternative sources of repayment are available,” CBK notes.
