ICEA LION head of research Judd Murigi, Business development and client relations general manager Elizabeth Irungu and chief investment officer Barack Obasta during the release of the January 2019 investor pulse at the Stanley Hotel in Nairobi on January 8, 2019. PHOTO | SALATON NJAU | NMG
ICEA Lion Asset Management says banks are likely to start raising the level of provisioning leading to a single-digit percentage growth in profits.
CEO Barack Obatsa said the full impact of switching to International Financial Reporting Standards (IFRS) 9 from International Accounting Standard (IAS) 37 will be felt this year, putting pressure on banks to increase provisioning and freeze on new jobs.
Banks’ profits are expected to grow at a slower pace in 2019 compared to last year on account of increased provisioning for non-performing loans.
ICEA Lion Asset Management, an investment firm with a portfolio of Sh125 billion assets, says banks are likely to start raising the level of provisioning leading to a single-digit percentage growth in profits.
Chief investment officer Barack Obatsa said the full impact of switching to International Financial Reporting Standards (IFRS) 9 from International Accounting Standard (IAS) 37 will be felt this year, putting pressure on banks to increase provisioning and freeze on new jobs.
“Last year, loan loss provisioning declined giving an appearance of strong headline profitability. But if you look at normalised profits, they have been under pressure,” said Mr Obatsa.
“This 2019, we may not see any bank doing double-digit growths in absence of this one off benefit. Banking sector will struggle to grow topline and layoffs may persist.”
As at the end of September last year, the initial impact of IFRS 9 implementation was more pronounced on capital ratios than on income statement. Profits for the sector rose by about 13.5 percent as loan loss provisioning fell 22.8 percent. However, going forward, IFRS 9 impact is expected to seep through profit and loss accounts, reducing the speed of profit growth.
Speaking during an Investor Pulse 2019 event in Nairobi, ICEA Lion Asset Management head of research Judd Murigi said higher provisioning may mean fewer or no jobs in the sector.
“Any time you adopt a new accounting standard, you are allowed to make an opening adjustment and that had a significant contribution to the low impairment charges in 2018. In absence of this, more provisioning is expected,” he explained.
He predicted that more banks will resort to job freeze or layoffs to defend their current margins or attempt grow top lines.
IFRS 9 came into force on January 1, 2018. It is a forward-looking standard as opposed to the historic-looking IAS 37 and it was therefore expected it would immediately trigger high provision.
Top banks such as Equity #ticker:EQTY, Kenya Commercial Bank #ticker:KCB and Cooperative Bank #ticker:COOP all lowered their levels of provisioning.
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