advertisement
Companies

Bank owners face Sh20bn dividend cut in new rules

CBK governor Patrick Njoroge. FILE PHOTO | NMG
CBK governor Patrick Njoroge. FILE PHOTO | NMG 

Bank owners are headed for a tough new year of flat or lower dividend payouts as the lenders move to comply with the more conservative accounting standards that will see Kenya’s six largest banks take a Sh20 billion hit to meet capital requirements alone.

The coming into force of the International Financial Reporting Standards 9(IFRS9) on January 1, 2018 will require banks to provide for expected loan losses rather than those already incurred, effectively cutting their profitability and eroding their capital base.

KCB #ticker:KCB, Co-op Bank #ticker:COOP, Equity #ticker:EQTY and Commercial Bank of Africa (CBA) books already show they had a minimum combined exposure of Sh20.2 billion as of September.

Barclays Bank of Kenya #ticker:BBK and Standard Chartered Bank (Kenya) #ticker:SCBK are also set to make higher provisions under the new regime.

These developments are in line with the Institute of Certified Public Accountants of Kenya’s (ICPAK) expectation that IFRS 9 would lower operating margins and profitability of financial institutions as they will have to set aside larger amounts in loan loss provisions.

advertisement
 

Interviews with multiple bank executives indicate that the new accounting rules are expected to diminish dividend payouts and slow down loan book expansion as the lenders react to capital erosion from the provisions and impairments.

Yusuf Omari, the chief financial officer at Barclays, said he expects the provisions will eat into retained earnings and subsequently affect dividends, capital adequacy and expansion.

KCB is expected to take the biggest hit as IFRS9 will supplant the current dual accounting process that has allowed Kenya’s biggest bank to accumulate the largest statutory loan loss reserve of Sh15.3 billion — most of which will go into provisions beginning next month.

Provisions for bad debt

Banks have had the option of gauging provisions for their bad debt using either Central Bank of Kenya (CBK) prudential guidelines or international accounting standards.

Most banks have operated on the understanding that they take the option that leaves them with the least load.

This means that if the international accounting standards showed a bigger number, a bank would simply take the hit in its profit and loss account without increasing its loan loss reserve.

Conversely, if the CBK process produced a larger sum, a bank will provide for the lower number and book the difference in its loan loss reserve.

With IFRS9 set to result in larger bad debt provisions compared to the CBK rules, analysts say accumulated loan loss reserves will all be consumed.

“It is certain that nearly all of the loan loss reserves will go into funding increased provisions under IFRS9,” a bank executive who did not wish to be named said.

KCB’s Sh15.3 billion is the largest loan loss reserve among the six banks, followed by Equity’s Sh2.2 billion, CBA (Sh1.9 billion) and Co-op (Sh717.8 million), taking the total to Sh20.2 billion.

Stanchart and Barclays — which adopted IFRS9 early — have no such reserves, but even they are expected to make larger provisions under the new regime.

The new accounting standards will require provisions to be made based on factors such as a bleaker outlook for a borrower’s industry even if the customer himself has not defaulted, a move meant to make banks adopt more conservative lending practices in the wake of the 2008 financial crisis.

The IFRS9 adds another major challenge to Kenyan banks that have seen their earnings drop by billions of shillings following last year’s introduction of interest rate controls.

Shareholders and the taxman are among the stakeholders expected to suffer financially from the sector’s reduced profitability.

Banks have paid some of the largest dividends at the Nairobi Securities Exchange #ticker:NSE, with the annual payout of KCB and Equity alone standing at more than Sh13 billion in recent years.

The twin challenge of more stringent accounting and narrower lending margins are expected to see banks retain more of the profits, leaving smaller sums available for distribution to shareholders.

Those that choose to raise their dividends risk tapping their shareholders for new capital in the coming years, reintroducing a wave of rights issues that has waned at the Nairobi bourse.

The Kenya Revenue Authority is expected to take issue with reduced taxes from banks as a result of the IFRS9, which will erode the lenders’ bottom-line on which they pay corporate tax.

advertisement