Shareholders of Kenya’s seven-biggest banks are set to get Sh34 billion in dividends, representing a 13.6 percent increase from last year. This is in a sharp contrast to the fate of borrowers who struggled to service their loans, going by an analysis of the lenders’ performance for the year ended December 2018.
The results data from seven of the eight tier-one lenders -- as per the Central Bank of Kenya classification -- shows that their cumulative dividend cheque will grow by Sh4 billion compared to the 2017 payout.
Commercial banks are by law supposed to release their annual results by the end of March, meaning that all the lenders have until Sunday to publish their 2018 results.
The banks’ dividend return is among the most attractive in the economy at present, outperforming the one-year Treasury bill which in 2018 averaged 10.5 percent yield.
The lenders also outperformed the real estate sector, whose rental yields rose by 9.5 percent in Nairobi and its environs, while house sale prices went up by 8.5 percent in 2018 as per a survey by realtors HassConsult.
The rise in the banks’ dividend payment matches their profit increase, having grown their net earnings by 13.6 percent or Sh10.2 billion to Sh85.3 billion.
The Nairobi Securities Exchange (NSE) #ticker:NSE listed lenders have also been under pressure from shareholders to give them a favourable dividend return (yield) at a time when capital gains on their stocks have been depressed.
Canaan Capital chief executive Rufus Mwanyasi said the increase in dividends payout is justified by the higher profits, but cautioned that the deteriorating quality of the lenders’ loan book is a cause for concern.
“This is a way of shoring up their share prices by enticing demand from investors through attractive dividend yields,” said Mr Mwanyasi.
“Asset-wise they have grown, as has their profitability, but the quality of the balance sheet has gone down as the non-performing loans portfolio keeps going up.”
The tier one banks that have released their results so far include KCB #ticker:KCB , Equity #ticker:EQTY, Co-operative Bank #ticker:COOP , Standard Chartered #ticker:SCBK, Barclays Kenya #ticker:BBK , Diamond Trust Bank #ticker:DTBK and Stanbic. Only the non-listed Commercial Bank of Africa of the top-eight is yet to release its financials.
The big lenders control 66 percent of market share in the industry, and up to 80 percent of sector profits.
Non-performing loans among the seven lenders went up by 17.2 percent or Sh22.3 billion in 2018 to Sh152 billion, their results show.
Latest CBK data shows the non-performing loans ratio for the entire banking sector stood at 12 percent at the close of 2018, compared to 10.6 percent at the end of 2017.
This is an indicator that as the owners of the banks enjoy good returns, their customers are increasingly struggling to repay loans even with the rate cap law limiting the maximum interest rate at 13 percent.
Majority of the lenders have however managed to avoid a hit on their profits through increased provisioning for the bad debts, taking advantage of a one-off opportunity to pass their provisions through capital reserves instead of the income statement during the transition to the IFRS 9 accounting standards.
The top-tier lenders have therefore cumulatively cut provisions on the income statement by 30.4 percent or Sh8.3 billion (to Sh19 billion), which has played a significant part in the profit growth for the year and in turn the higher dividend payout.
Only Equity and Stanbic banks raised their provisions in 2018 among the seven who have reported so far.
According to Mr Mwanyasi, the lenders are likely to rely on cost-cutting this year — by turning to digital platforms — to absorb any potential hit on profit now that they have to provision for all doubtful loans through the income statement.
The higher profits have also been largely driven by higher investment in risk-free government securities.
The lenders increased their investments in the government paper by 9.7 percent last year to Sh700.6 billion, in turn seeing their interest earnings from the securities go up by 13.7 percent or Sh62 billion to Sh76.3 billion.
They grew their loan books at a slower pace of 3.6 percent or Sh57.3 billion to Sh1.63 trillion, and saw the interest income from loans to customers go up by a similar rate to Sh192.9 billion.
Non-funded income (NFI), which banks increasingly turned to in the wake of the signing of the rate cap law in August 2016, also under-performed for top-tier lenders last year. They cumulatively saw their NFI go up by just 0.9 percent in 2018 to Sh95.5 billion.
This was partly due to the shift to government lending as opposed to customer loans which attract fees and also commissions.