Commercial banks’ pre-tax profit rose by 12.6 percent to a record Sh85.8 billion in six months to June, signalling the lenders’ resilience in a tough economy that has seen multiple companies announce a sharp decline in earnings and an increase in staff layoffs.
The latest Central Bank of Kenya (CBK) data shows that banks grew their profits at a much faster pace this year compared to last year when the first half pre-tax earnings increased 9.8 percent to Sh76.2 billion.
The sector has leaned heavily on the Jubilee government’s high appetite for loans, pumping billions into Treasury securities while shunning small businesses and individual borrowers, citing inability to assess their default risks due to the interest rates cap.
Banks have largely starved the private sector of loans -- the annual growth rate in June was a weak 5.2 percent -- which has hurt the chances of more inclusive economic growth.
The lenders’ lobby, Kenya Bankers Association (KBA), acknowledges that the reliance on government securities for profit growth is ultimately unsustainable, and leaves the lenders vulnerable should the Treasury find a way of lowering its debt ceiling.
“Unfortunately, the profits from banks are not coming from crucial areas such as extending credit to the SMEs. Instead, they are coming from areas such as significant lending to government through purchasing Treasury instruments… ideally, the profitability of banks should be aligned to the economic aspirations of the country,” said KBA chief executive officer Habil Olaka.
He, however, added that a significant portion of the lenders’ earnings is also coming from cost-cutting measures.
“Additionally, banks are making profits by becoming lean and efficient by leveraging on technology, reducing cost overheads, trimming branch networks and by cutting their staff numbers.”
The reluctance to lend to the private sector is seen in the faster growth in bank deposits compared to the loan books, with the difference largely being pushed to government bonds.
The sector’s gross loans rose by 6.5 percent or Sh161 billion in the six-month period to Sh2.654 trillion, while the deposits went up 12.6 percent or Sh344.5 billion to Sh3.506 trillion.
The falling interest rates on government paper, however, offer hope that the lenders will be forced to shift back to customer loans in search of higher profit margins.
Mr Olaka added that the lenders will continue to push for the lifting of the control on cost of loans, which they say will raise lending to the private sector and offer them a more reliable source of interest income.
This is, however, likely to meet headwinds as Parliament looks like it is still convinced that repealing the rate cap law will lead to a return to the days of punitive interest rates.
The fact that banks are cutting costs to grow profitability has also meant that their employees are suffering the same fate as workers in other sectors who have been laid off.
While other firms are shedding jobs because of lower earnings, bank staff are being laid off in times of plenty.
There is only so much that they can cut however in costs, especially by reducing their workforce, making this yet another unsustainable way of driving profit growth.
The latest lender to announce job losses is Stanbic Kenya, which plans to shed at least 200 in an early retirement plan by the end of this year.
Barclays Kenya, Equity Group, HF Group, KCB, Stanbic and Standard Chartered Kenya, recorded a 1,592 reduction in their combined headcount last year in industry realignments attributed to new digital delivery channels.
This could be worsened by the impending mergers between KCB and NBK and Commercial Bank of Africa and NIC as hundreds of employees find themselves in duplicated roles that will most likely have to be trimmed.
For the other sectors, the going has proved difficult in the recent past.
16 listed firms have issued profit warnings since June last year, with the effect of their profits collectively plunging by more than Sh14 billion.
The majority State-owned electricity distributor, Kenya Power, Bamburi Cement, Kenya Re, Britam, HF, National Bank, Sanlam and UAP Holdings are some of the big publicly-traded firms that either reported or warned investors to brace for at least 25 percent fall in full-year earnings.
Additional reporting by Patrick Alushula.