Banks’ loan risks rise despite profits

The Central Bank of Kenya. A CBK report shows banks may have lent less creditworthy borrowers during a high interest regime. Photo/File 

By GEOFFREY IRUNGU

Posted  Tuesday, March 19  2013 at  19:38

In Summary

• The lower assets quality points to inherent risk ahead as banks may be forced to provide for loan loss in their profit-and-loss accounts.
• It also reflects distress by borrowers as banks raised lending rates to make a record profit.

Commercial banks’ profits rose by a fifth last year at the expense of the quality of loans, an official industry report shows.

The lower assets quality points to inherent risk ahead as banks may be forced to provide for loan loss in their profit-and-loss accounts and depress shareholder payouts. It also reflects distress — expected to grow due to political uncertainty this year — by borrowers as banks raised lending rates to make a record profit.

Pre-tax profits stood to Sh107.7 billion in 2012 compared to Sh89.6 billion in the previous year, thanks to the aggressive marketing stance adopted by the sector in the second half of the year after a low-loan uptake in the first half.

Newly published Central Bank of Kenya Credit Officers Survey Jan-Dec 2012 report disclosed that gross non-performing loans (NPLs), however, increased by 13.33 per cent to Sh61.6 billion last year, pointing to the fact that the institutions may have lent less creditworthy borrowers during a high interest regime.

“For the first quarter of 2013, most banks expect the levels of non-performing loans to increase due to expected rise of political risk arising from March 2013 elections,” said the CBK report.

One fact, though not directly mentioned by the report, is that the country’s economic activities came to a near standstill in the week following the March 4 General Election as the tallying of votes took place.

Lending rates rose dramatically from the last quarter of 2011 discouraging many would-be creditworthy borrowers from taking loans. Banks were apparently left with a good number of clients who were keen to take loans but had no proper plans to repay, leaving the sector with lower quality portfolios, a situation technically called adverse selection.

According to the Credit Officer Survey, demand for credit increased in nine of 11 sectors but that from the mining, quarrying and trade sectors remained unchanged in the year. A major increase in the borrowing was due to the lower lending rates during the second half of 2012.

Last year, banks eased credit standards for agriculture, manufacturing and trade sectors while they remained unchanged in all other sectors.

“There was general optimism in the economy due to the fall in interest rates (that came in the second half of 2012) and as a result banks increased supply of international finance to manufacturing, energy and trade sectors,” said the report.

Due to the rise in NPLs, credit officers said they would intensify debt collection efforts in the first quarter of this year as a pro-active measure “to curb any form of negative outcomes caused by the March 2013 elections as well as to recover any non-performing loans mainly arising from the high interest rate regime recently experienced by the sector.”

In earlier interviews market players said NPLs were a result of high interest rates and tended to depend on the banks especially given that interest rates also differed from institution to institution.

“The non-performing loans are specific to individual banks, but one would say that higher interest rates have eroded many borrowers’ ability to service the loans, leading to deterioration of loan performance,” Diamond Trust Bank finance and planning director Alkarim Jiwa told the Business Daily towards the end of last year.

“In the fourth quarter of 2012, there was an expectation of NPLs increase in the first quarter of 2013 in the trade, tourism and communications, and real estate sectors as a result of increase political risk,” said the report.

When interest rates fell, demand for credit from the manufacturing sector rose to 51 per cent in the quarter ended December 2012 from the previous quarter.

The report said banks tightened credit standards towards the end of the year as they realised the need to shore up their capital positions in order to comply with the enhanced capital adequacy requirements.