Commercial banks’ pre-tax profit rose 16.1 percent to Sh139.6 billion in the half year ended June 2024, marking a record performance in an environment of costlier credit that has increased loan defaults and reduced appetite for borrowing.
The latest Central Bank of Kenya (CBK) data shows the earnings grew from Sh120.2 billion a year earlier, raising the prospect of higher dividend payouts for shareholders when the full year closes in December.
It also marked the fourth straight half-year of increased profits.
The record profits have come on the back of the central bank rate (CBR) —the base lending rate before factoring in margin and risk — hitting 13 percent, a level last seen in September 2012, translating to higher interest income for banks.
Banks have, however, had to wade through mounting defaults and reduced appetite for borrowing due to the elevated cost of credit. Non-performing loans (NPLs) ratio —the portion of the loan book for which no interest or principal has been paid for at least three months— hit 16.3 percent in June, the highest in over 16 years.
The CBK's credit survey report shows pre-tax net profit for the first three months of the year was Sh73.5 billion, before slowing to Sh66.1 billion in the second quarter to June in a period marked by floods and widespread anti-government protests.
The overall performance in the first half of the year was, however, enough to ensure banks’ six-month earnings maintained a growth trajectory since the 30.1 percent drop that was witnessed in a similar period in 2020 due to disruptions brought by the Covid-19 pandemic.
The half-year results put the sector on course to reverse the 2023 full year’s performance in which pre-tax earnings declined by 9.3 percent to Sh226.3 billion as the higher loan defaults forced the institutions to increase provisions.
The sector’s profit decline in the year ended December 2023 marked 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 the pandemic disrupted economic activities.
Stanbic Holdings, Equity Group, Co-operative Bank of Kenya and Habib Bank AG Zurich have all reported increased profits in their half-year results. Others are expected to publish their performance by the end of the month.
Interest rates have been rising in line with increased CBR as the CBK battled high inflation and a weaker shilling to the dollar. The hikes took interest rates on loans to above 25 percent, with the likes of Equity pricing their credit as high as 26 percent by January this year.
CBK data shows banks’ loan book closed June at Sh4.04 trillion, being a Sh181.1 billion drop from Sh4.22 trillion in January —majorly a reflection of reduced appetite for new loans from customers. The drop was partly on the decline in the value of dollar-denominated loans as the shilling gained value against the dollar.
The regulator said the decline in the demand for credit was linked to high interest rates given that the CBR closed June at 13 percent.
“The cost of borrowing and retention of the CBR led to decreased demand for credit,” said the CBK in the survey that also showed a spike in bad debt.
The regulator said last week that private sector credit growth was 4.0 percent in June, the slowest since the 3.4 percent in February 2019, showing that individuals and businesses developed a moderate appetite for fresh loans.
The regulator raised the benchmark rate from 12.5 percent in December 2023 to 13 percent in February this year, leaving it there until last week when it was lowered to 12.75 percent, marking the first reduction since April 2020.
In the three months to June, the loan book dropped by Sh42.3 billion, driven by declines in agriculture, manufacturing, mining and quarrying, financial services and tourism, restaurant and hotels sectors.
The CBK said there was a perceived increase in demand for credit in trade, and personal and household sectors, mainly attributed to increased working capital requirements due to increased cost of doing business and rising demand to finance goods.
Earlier disclosures by the CBK had shown NPLs ratio stood at 16.3 percent in June compared with 14.8 percent in December last year. Gross NPLs were at Sh662.2 billion by the end of April.
In the credit survey, 48 percent of the credit officers polled from 39 banks indicated that NPLs are likely to rise in the third quarter ending September while 18 percent expect them to remain unchanged. About 34 percent see a fall.
“Banks expect to intensify their credit recovery efforts in eight economic sectors and retain them in three sectors (mining and quarrying, energy and water and financial services). The intensified recovery efforts are aimed at improving the overall quality of the asset portfolio,” said the CBK.
