Provisioning for non-performing loans (NPLs) in the banking sector could rise by 52.9 percent in 2019, slowing down profitability.
Genghis Capital, an investment bank, says it will not be possible for banks to maintain the benign provisioning witnessed last year that helped the sector’s profitability to grow at the fastest pace in three years.
Last year, many banks covered most of their NPLs through balance sheet reserves as opposed to income statement as they transitioned to International Financial Reporting Standard (IFRS) 9. Genghis say this window is not available in 2019.
“We project that provisions will rise by an average 52.9 per cent year-on-year in 2019 as the base effect brought about by the day one IFRS 9 write-off will have already come into effect,” said Genghis in its latest research.
In an analysis based on eight tier I banks under its coverage—including KCB Group, Equity Bank and Cooperative bank—Genghis anticipates that provisions will rebound to levels seen in 2017.
Other banks captured in the analysis are Standard Chartered Bank, Barclays Bank, Stanbic Holdings, DTB Bank and I&M Holdings.
Against this outlook, Genghis has only recommended a “buy” decision on two banking stocks, a “hold” decision on five and “sell” on one.
Last year, the sector’s total pre-tax profits hit a record high of Sh152.3 billion, surpassing the previous earnings peak reported before the introduction of interest rate control. This was partly helped by lower provisioning.
“Provisions declined generally across the sector as banks were required to write off provisions, based on historical assessment, through capital as a one-off adjustment, during the transition from International Accounting Standard (IAS) 39,” notes Genghis.
The investment bank says that coverage levels have generally declined over the period under review, setting stage for a surge in provisioning.
The asset quality, mainly measured by the portion of loan book that is not performing, has been deteriorating over the past three years.
The average NPL ratio was recorded at 12 per cent in December 2018 compared to 6.8 per cent at the end of 2015.
However, Genghis projects the asset quality to improve gradually on account of more stringent credit profiling with onset of IFRS 9.