Rising pile of bad debt raises red flag on health of banks

Analysts said most banks had been hit by increased regulatory surveillance in the wake of last year’s collapse of two lenders in a row. PHOTO | FILE 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Quality of assets in question as five lenders more than double their provisions for bad loans in a span of 12 months.
• Some lenders more than doubled their provisions for non-performing loans (NPLs) between 2014 and 2015, coinciding with the regime change at the CBK that brought in the hawk-eyed Patrick Njoroge as governor.
• Underprovisioning for bad loans may help banks report better profits, but in the event that a large number of borrowers fail to meet their obligations, it exposes the lenders to financial difficulties and even possible collapse.

Kenyan banks significantly increased their provisioning for bad loans in 2015 in a move that has surprised the market and raised questions about the quality of oversight that the Central Bank of Kenya (CBK) provided under the leadership of Njuguna Ndung’u.

Standard Chartered, Chase Bank, National Bank and Bank of Africa are some of the lenders that more than doubled their provisions for non-performing loans (NPLs) between 2014 and 2015, coinciding with the regime change at the CBK that brought in the hawk-eyed Patrick Njoroge as governor.

The lenders have also recorded a steep rise in NPLs, signalling the effect that tougher economic times has had on the pockets of borrowers.

A number of international institutions, including the International Monetary Fund, ratings agency Moody’s and Citigroup’s investment banking arm, warned that the lenders would take a hit by increased provisioning for bad loans as the CBK heightened its scrutiny of their books.

Analysts said most banks had been hit by increased regulatory surveillance in the wake of last year’s collapse of two lenders in a row.

“After the Imperial Bank and Dubai Bank crisis late last year, the regulator has become stricter in interrogating how the banks report their books,” said Burbidge Capital head of research Vimal Parmar, insisting that stricter supervision remained the key determinant of the lenders’ performance.

“It also has an economic angle because the steep rise in interest rates during the last quarter of 2015 should have been expected to affect NPLs depending on who the banks lend to.”

READ: CBK seeks further probe before giving direction on fate of Imperial Bank

Underprovisioning for bad loans may help banks report better profits, but in the event that a large number of borrowers fail to meet their obligations, it exposes the lenders to financial difficulties and even possible collapse.

Bank of Africa, a third-tier lender, for instance, increased its loan loss provisions fivefold to Sh2.1 billion between 2014 and 2015 as gross non-performing loans quadrupled to Sh9.7 billion from Sh2.4 billion.

The bank said 15 large customers accounted for more than half of the bad debts and reported a net loss of Sh1.02 billion compared to a net profit of Sh144 million in 2014.

StanChart, whose net earnings dropped by 39 per cent to Sh6.3 billion, increased its bad loans provision threefold from Sh1.3 billion to Sh4.9 billion after its bad loans book grew from Sh10.75 billion to Sh14.69 billion. 

Chase Bank increased its provisions by similar margins to Sh2.17 billion from Sh794 million a year earlier following the tripling of bad loans to Sh11.87 billion from Sh3.41 billion in 2014.

National Bank’s drop to the loss-making territory from a Sh870.7 million profit in 2014 came on the back of a massive increase in loan loss provisions from Sh525.3 million to Sh3.72 billion and a 63 per cent rise in NPLs to Sh11.76 billion.

READ: CMA on the spot as NBK reports Sh1.2bn loss