Regional banks face risks even as they turn a profit

 

Standard Chartered Bank branch on Kenyatta Avenue in Nairobi. StanChart reported net profit of Sh2.5 billion in the first quarter compared to Sh1.8 billion a year earlier. Photo/FILE

By George Bodo

In Summary

• Kenyan lenders’ forays into the EAC market have been quite challenging.

Over the last decade, Kenyan banks have aggressively expanded operations into East African Community (EAC) member states and South Sudan.

In fact, data from the Central Bank of Kenya shows that, at the close of 2012, 11 Kenyan banks had subsidiaries in EAC and South Sudan.

 

Additionally, cross-border assets, loans and deposits accounted for 12 per cent, 10 per cent and 12 per cent respectively of their total assets, loans and deposits.

But these regional forays by Kenyan banks, a majority of them achieved through brownfield operations, have been very challenging with the subsidiaries posting successive losses.

However, latest results suggest that in 2013 Kenyan banks were in the profit zone. At the close of the year, the five listed banks with significant cross-border operations namely KCB, Equity Bank, Diamond Trust Bank, I&M and NIC returned a combined profit before tax of Sh6 billion compared to a loss of Sh13 billion in 2012.

These five banks combined accounted for 62 per cent and 75 per cent of total cross-border assets and customer deposits respectively.

A key success factor was their ability to contain the cost base, both balance sheet funding costs and operating costs. Overall, cross-border cost base as a percentage of total costs declined to 25 per cent from 31 per cent in 2012.

However, despite successfully containing the cost base and making profits, there are still a couple of concerns regarding their regional operations; and so the question is whether they will be able to sustain this profitability going forward.

First, is the issue of non-performing loans, which continues to record notable growth. At the close of 2013, the combined share of cross non-performing loans as a percentage of total non-performing loans for the five banks rose to 19 per cent from 15 per cent in 2012.

This serves to show that there are still potential risks arising from non-performing assets.

Weakening asset

Some of the banks have had to provide significantly for their subsidiary businesses. For instance, in 2013 NIC Bank had to provide significantly for one of its subsidiaries owing to a weakening asset book quality.

Even KCB’s South Sudan operations continue to present significant asset quality challenges, primarily owing to the country’s ongoing political turmoil.

Data at the close of February 2014 suggested that South Sudan’s asset quality stood at 20 per cent (though not big enough to contaminate group asset quality, but is a short-term concern) and the bank had to take a significant provision in the first quarter.

The second issue, which remains critical, is capital measurement as currently stipulated by the Central Bank of Kenya. The current measurement regime does not take into account cross-border risks.