Capital Markets

Top banks set aside Sh109bn for loan losses

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A customer in a banking hall. FILE PHOTO | NMG

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Summary

  • Higher provisions have the effect of hitting the bottom-line while eroding the capital base and led to dividend payouts from listed banks falling 43.6 percent to Sh19 billion.
  • The economic disruption brought by the Covid-19 pandemic is the biggest driver of the increased provisions, with most sectors including tourism, transport, real estate and households hurt by the fallout.

Kenya’s top nine listed banks raised their provision for non-performing loans by a record Sh77.3 billion in the year ended December, cutting their combined net earnings by 25.5 percent to Sh81.2 billion.

KCB, Equity, Co-op Bank, I&M #ticker:IMH, Absa Bank Kenya #ticker:ABSA, NCBA, Standard Chartered Bank Kenya, DTB #ticker:DTB and Stanbic Holdings #ticker:SBIC made provisions of Sh109.7 billion in the review period, up from Sh32.3 billion the year before.

This came as gross defaults expanded from Sh255 billion to Sh366 billion, a rise of Sh110.9 billion.

Higher provisions have the effect of hitting the bottom-line while eroding the capital base and led to dividend payouts from listed banks falling 43.6 percent to Sh19 billion.

Part of the provisions represent estimates of potential losses from defaults expected in the near future because of general economic weakness or problems specific to certain industries and customers.

Beginning January 1, 2018, banks have been required to make provisions for expected loan losses rather than those already incurred following the adoption of the more conservative International Financial Reporting Standards (IFRS 9).

The economic disruption brought by the Covid-19 pandemic is the biggest driver of the increased provisions, with most sectors including tourism, transport, real estate and households hurt by the fallout.

Banks made the provisions amid a grim economic outlook, with real GDP growth for 2020 expected to come in at a mere one percent, according to the International Monetary Fund (IMF).

The latest partial lockdown of Nairobi, Kajiado, Machakos, Nakuru and Kiambu counties amid increased coronavirus infections and deaths is once again hurting the economy that had started recovering from removal of earlier restrictions in August last year.

The Central Bank of Kenya (CBK) expects banks to keep raising their provisions to keep up with the ongoing difficulties, with customers defaulting on Sh432 billion worth of loans across the entire industry as of February.

“The ratio of non-performing loans (NPLs) to gross loans stood at 14.5 percent in February compared to 14.1 percent in December. NPL increases were noted in the real estate, agriculture, personal and household, and manufacturing sectors,” CBK said in a statement.

“The increases in NPLs were attributable to the subdued business environment, and banks continue to make provisions for the NPLs.”

Reopening the economy, coupled with mass vaccinations, could brighten the business outlook in the coming months. Before the new lockdown, economic performance this year had been projected to improve significantly at a real GDP growth of 4.7 percent, according to the IMF.

“Improving prospects for Covid-19 vaccines should enable the economy to transition back to growth through 2021,” StanChart’s #ticker:SCBK chief executive, Kariuki Ngari, said in a recent statement.

Should the economy improve faster than anticipated, banks will slow down their provisions.

The uncertainty has caused the nine banks to seek shelter in government bonds and T-bills, which offer guaranteed income and does not burden their capital base by requiring large provisions.

Their holdings of government securities increased by Sh234.2 billion to Sh1.2 trillion while loans rose by a smaller amount of Sh219.7 billion to Sh2.4 trillion.

Most of the institutions, with the exception of Co-op Bank #ticker:COOP and NCBA #ticker:NCBA, have also reduced or suspended dividend to bolster their capital or retain funds for expansion.

Equity, for instance, skipped dividends in 2019 and 2020, saving it a total of Sh15 billion. It reported the smallest profit drop among the big banks at 11.6 percent to Sh19.7 billion in the year ended December, helped by a large deferred tax of Sh8.2 billion.

Deferred taxes are obligations arising in the review period but will be paid in the future.

Equity’s #ticker:EQTY increased conservatism arises from the economic fallout from the pandemic besides the acquisitions it has been pursuing.

The bank spent $95 million (Sh10.4 billion) last year to buy a 66.5 percent stake in DRC’s Banque Commerciale Du Congo.

KCB #ticker:KCB reduced its dividend payout by Sh7.8 billion and has proposed a payout of Sh3.2 billion or Sh1 per share, down from Sh11 billion or Sh3.5 per share the year before.

Like Equity, KCB slashed its dividends partly to build a war chest to fund its impending acquisitions.

KCB is set to spend Sh4.4 billion to buy two banks in Tanzania and Rwanda from Atlas Mara, with the transactions expected to be concluded by June.