Companies

Volatile shilling hurts NSE firms as banks profit

OIGARA

KCB Group CEO Joshua Oigara (right) and chief finance officer Lawrence Kimathi at a past press briefing. The bank's net profit for the nine months to September has grown by 10 per cent. PHOTO | FILE

Kenyan manufacturers and services sector companies are counting losses from a difficult operating environment poisoned by the recent wave of exchange rate volatility, even as commercial bank profits stayed on a steady growth path.

At least four Nairobi Securities Exchange-listed firms have announced half-year losses or profit dips they have attributed to the steep rise in operating costs arising from exchange rate volatility at home and in neighbouring economies, which they have been unable to offset by raising prices.

A general depreciation of national currencies in the region has also inflated finance costs on foreign currency-denominated loans, besides the rising interest rates burden from central bank actions to stabilise markets.

Cement maker ARM Cement and tyre manufacturer Sameer Africa top the list of NSE-listed firms that have issued profit warnings, even as most banks announced double-digit profit growth and stayed on course to boosting their earnings from lending and forex trading.

The manufacturers’ latest performance reflects the earnings rift between banks and players in the real economy that is periodically caused by major deterioration in the macroeconomic environment and the resulting action by central banks.

ARM, for instance, sunk into losses primarily on account of finance costs on its $152.2 million (Sh15.3 billion) foreign debt, including the loan it obtained from Lagos-based Africa Finance Corporation (AFC).

The cement manufacturer made a net loss of Sh355.8 million in the half year ended June, reversing a net profit of Sh847.2 million the year before.

ARM’s finance costs rose 2.8 times to Sh627 million in the period, even as it raised its provisions for potential foreign exchange losses 54 times to Sh1.4 billion.

“The sharp depreciation of both the Kenyan and Tanzanian currencies in the past few weeks has resulted in an unrealised exchange loss of Sh1.4 billion from our US dollar-denominated borrowings, including the convertible loan notes to AFC,” ARM said in a statement.

READ: Two NSE-listed firms report losses as Sameer’s profit falls

The company’s revenues grew by a marginal 1.6 per cent to Sh7.6 billion, highlighting the little headroom it had to compensate for the forex losses by raising prices.

The Kenyan shilling, for instance, has depreciated by about 12 per cent since the beginning of the year to trade at 101 units against the dollar.

The depreciation of the local currency has been linked to the huge current account imbalance that has been beset by lower export and tourism earnings and a stronger performance of the US economy that has seen the dollar appreciate against East African currencies where Kenyan firms draw part of their revenues.

Car & General (C&G), which has a presence in 10 countries in the Eastern African region, also took a beating from the multiple exposures to currency swings.

“The recent devaluations since March of the Kenya, Tanzania and Uganda shillings of approximately 10 per cent, 22 per cent and 16 per cent respectively has resulted in substantial foreign exchange losses,” the company said in a statement.

“In addition, increasing competitive pressures have made it difficult for the company to sufficiently increase prices… to accommodate these cost increases and preserve full margins.”

C&G has consequently issued a profit warning for the year ending September, meaning that the firm does not expect a net profit exceeding Sh208 million in the period compared to the Sh278.3 million it made the previous year.

The company said in its earnings alert that the losses from the currency depreciations will most likely surpass any revenue growth.

Sameer Africa tried to raise the prices of its tyres to offset costs but faced a backlash from customers that led to a contraction of its profits.

“Following significant depreciation of the Kenya shilling against the US dollar in the period, the company responded by increasing selling prices in May 2015 in order to protect margins,” Sameer said in a statement.

“The increase in prices further depressed volume sales across the network.”

The weak shilling, Sameer noted, had significantly increased the cost of raw materials besides raising borrowing costs.

READ: Sameer eyes Nigeria and Mauritius to boost sales

The company’s net profit fell 40.7 per cent to Sh47.9 million in the half year ended June when it reduced its outstanding debt by Sh1.6 million to register a 3.2 per cent decline in finance costs to Sh27.6 million.

Sameer’s turnover declined 1.4 per cent to Sh2.6 billion, underlining the difficulty manufacturers are facing in trying to pass on additional costs to customers.

TPS Eastern Africa, the operator of the Serena chain of hotels, also took a hit from the weakening shilling that inflated its foreign debt repayment.
The company made a net loss of Sh97.2 million in the half year ended June, reversing a net profit of Sh41.4 million the year before.

TPS’ forex losses rose 5.1 times to Sh75.1 million even as the net interest cost nearly doubled to Sh108 million in the period.

The company’s sales declined 9.5 per cent to Sh1.7 billion, trailing costs at a time when the tourism industry continues to battle travel advisories and negative publicity brought by terrorist attacks.

The malaise seen in the manufacturing and services industries contrasts sharply to the banks’ profit machine that charges on despite the macroeconomic challenges.

The country’s two biggest banks KCB and Equity grew their half-year net profit by double digits.

KCB’s net profit in the period rose 13 per cent to Sh9.2 billion while that of Equity jumped 11.8 per cent to Sh8.5 billion, with their earnings dwarfing the market capitalisation of several NSE-listed manufacturers.

Banks have the advantage of earning more from the same stock of loans as interest rates rise, with the lenders having raised their interest rates by at least 1.33 percentage points this month after the CBK increased the base price for loans to 9.87 per cent from 8.54 per cent.

The banking industry has recorded a relatively small increase in bad debts due to higher interest rates, resulting in significant net gains when the CBK tightens liquidity to save the shilling and rein in inflation.

The currencies’ volatility also plays into the hands of banks, invigorating their forex trading activities that rake in substantial fees.

These dynamics have seen banks pull away from other firms that are struggling to control costs and grow revenues in a challenging environment.