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Lower loans loss provision signals rising confidence


The loan loss provision by Kenyan banks fell 33 per cent in the first-half of 2018 despite a rise in bad debts, new data showed, an indication that lenders are confident of offsetting the risk of recoveries.

The loan loss provision conventionally covers diverse factors related with potential loan losses including Non-Performing Loans (NPLs) or simply bad loans, customer defaults and renegotiated terms of a loan that incur lower than previously estimated payments.

Analysis of financial fillings by individual banks showed that cumulative provision for loan loss in the six months between January and June this year dipped to Sh12.9 billion compared to Sh19.46 billion recorded over a similar window of 2017. Five of the 39 commercial lenders reported a reduction in loan loss provisions by over Sh1 billion each.

This came as the cumulative loan book for all banks climbed to Sh2.4 trillion for the six months to June 2018 from Sh2.36 trillion in a similar period of 2017.

Contrastingly, the lenders registered an increase in NPLs to Sh300.6 billion in the six months to June compared to Sh240billion over a similar period of last year — an equivalent of a 25 per cent jump.

Under a new international accounting standard, IFRS 9's, commercial banks are obligated to constantly list any expected credit loss (ECL) to improve the accuracy of their financial status. For example the expectation is that whenever a lender’s NPL ratio deteriorated, there has to be a corresponding rise in provision to cover such risk.

Co-operative Bank #ticker:COOP for instance had its bad loans at Sh28.21 billion in the first-half of 2018 compared to Sh12.22 billion over a similar period last year, marking a 130 per cent growth. CFC Stanbic #ticker:CFC and I&M Bank #ticker:I&M also had bad loans jumping by enormous amounts of Sh4 billion and Sh11.4 billion in the first-half of 2018 respectively.

CFC Stanbic had Sh10.55 billion NPLs in the first six months, up from Sh6.48 billion over a similar period of last year while I&M Bank recorded Sh20.28 billion in the first six months of 2018 compared to Sh8.86 billion during a similar window of 2017.

NIC #ticker:NIC and KCB #ticker:KCB had the highest drop in loans loss provisions cutting theirs by Sh1.3 billion and Sh1.184 billion, respectively. NIC Bank’s bad loans provision stood at Sh0.11 billion, down from Sh1.44 billion over a similar period last year.

KCB reported Sh0.82 billion in provisions compared to Sh2.01billion over a similar period of last year.

With a higher ratio of NPLs over the first-half of 2018, the expectation is that banks’ provision for bad loans would have climbed over the period. This hasn’t happened — an indication that they are confident that the bulk of loan facilities would be offset.

The confidence may be partly attributable to the fact that the country’s economy is coming out of a thorny operating environment occasioned by the effects of a prolonged electioneering period last year, a biting drought and a rate capping law that stifled credit growth.

Indicatively, Kenyan banks collectively earned Sh58.6 billion net profit in the first six months, posting a 12.7 per cent growth--- taking their profits back to pre-interest rate cap levels.