A housing estate: The real estate sector recorded the highest increase
in NPLs over the quarter by Sh5.9 billion or 42.3 per cent. PHOTO |
FILE
By VICTOR JUMA, vjuma@ke.nationmedia.com
In Summary
- Gross non-performing loans (NPLs) rose 15.8 per cent to Sh170.6 billion in March compared to Sh147.3 billion in December.
- The building boom has been driven by insurers, investment firms and wealthy individuals, some of whom have taken large loans to undertake multi-billion-shilling projects in the major towns.
- Besides a turbulent labour market and tapering demand for new housing units, the spike in bad debts was also driven by a general slowdown in activity in other economic sectors, including trade and manufacturing.
- For banks, growth of NPLs means profitability will depend on how well individual institutions can control their overall costs amid pressure to boost their loan loss provisions in a move that will weigh down their bottom-line.
Kenyan banks reported a steady rise in the pile of
bad debts in the first three months of the year saddled by a slowdown in
the real estate sector and increased retrenchment of formal sector
workers, according to newly-released official data.
Gross non-performing loans (NPLs) rose 15.8 per cent to
Sh170.6 billion in March compared to Sh147.3 billion in December, the
Central Bank of Kenya (CBK) says in its first quarter industry report.
“Real estate sector recorded the highest increase
in NPLs over the quarter by Sh5.9 billion or 42.3 per cent. This is
attributable to slow uptake of housing units,” the CBK report says,
adding that the pile of bad loans in the personal/household sector
increased by Sh5.7 billion or 21.5 per cent between December 2015 and
March 2016 “as a result of negative macroeconomic drivers such as job
losses and delayed salaries.”
Besides a turbulent labour market and tapering
demand for new housing units, the spike in bad debts was also driven by a
general slowdown in activity in other economic sectors, including trade
and manufacturing.
A growing stock of bad loans means banks’ profit
margins will be squeezed in the short term saddled by a corresponding
increase in loan loss provisions to absorb potential losses in their
balance sheets.
The 42.3 per cent rise in the property market’s
NPLs to Sh19.7 billion indicates that developers have satisfied a large
part of the pent-up demand for commercial and residential housing.
The real estate boom that has been under way for
more than a decade has attracted major investments, with Nairobi alone
approving more than 250 buildings plans valued in excess of Sh18 billion
each month.
The building boom has been driven by insurers,
investment firms and wealthy individuals, some of whom have taken large
loans to undertake multi-billion-shilling projects in the major towns.
A slowdown in the property market risks to specifically hurt lenders with a huge exposure to the industry.
HF Group,
one of the biggest financiers of the real estate sector, says it
derives most of its earnings from that industry through provision of
mortgages and project finance.
The lender’s gross bad debts rose to Sh4.5 billion
in March from Sh4 billion in December, mirroring the growth of doubtful
loans across the banking sector.
Meanwhile, financial institutions with a large presence in retail banking – including KCB Group and Equity Group — are expected to bear the brunt of ongoing retrenchment in corporate Kenya.
Scores of companies, including Uchumi Supermarkets, Standard Chartered Bank Kenya and Atlas Development & Support Services, have, in recent months, laid off significant numbers of workers, some of who had bank loans.
Laid off workers
Last Friday, national carrier Kenya Airways
announced that it had started its long-awaited retrenchment plan with
80 employees, highlighting the rising risk of unsecured lending to
salaried individuals.
KQ, as the airline is popularly known, has also
been delaying salaries of its employees, a development that has put many
at loggerheads with lenders.
Formal sector workers typically borrow to fund
consumption or acquire personal assets, including cars and houses and
rely on their jobs to repay the loans.
Some of the retrenched workers have defaulted on their loans, leading to auctioning of their assets.
Banks with large distribution networks like Equity
and KCB account for most of the retail lending business, which is
expected to have contributed to their stock of bad debts in the review
period.
KCB, for instance, saw its gross NPLs rise to
Sh30.4 billion in March compared to Sh23.4 billion in December while
that of Equity increased to Sh10.9 billion from Sh9 billion over the
same period.
The two banks are, however, well diversified by
customer base, with their aggregate bad loans incorporating defaults by
businesses, large and small.
The CBK report shows that lenders are also
suffering from defaults in other sectors, including trade and
manufacturing, indicating a significant business slowdown even as
macroeconomic numbers show the economy continues to expand.
Bad debts from the trade sector, for instance,
jumped nine per cent to Sh50.6 billion in the period while NPLs by
manufacturers increased 15.5 per cent to Sh19.8 billion.
“The manufacturing sector had an increase in NPLs …
due to slowdown in business, leading to failure to generate enough cash
flows to meet all financial obligations,” reads part of the report.
While most sectors registered distress in terms of
cash flows and loans repayments, the overall economy expanded 5.9 per
cent in the first quarter of the year compared to five per cent the year
before.
The Kenya National Bureau of Statistics (KNBS)
attributed the GDP performance to growth in all sectors of the economy,
indicating that the rising bad debts are not indicative of a wider
economic malaise.
Agriculture, for instance, registered a 10.7 per cent drop
in NPLs to Sh7.5 billion in what the report attributed to improved
weather conditions.
Transport and communications also recorded a 31.1
per cent decline in bad debts to Sh12.3 billion as improved
infrastructure and road safety rules strengthened the financial position
of firms in that industry.
For banks, the growth of NPLs means profitability
will depend on how well individual institutions can control their
overall costs amid pressure to boost their loan loss provisions in a
move that will weigh down their bottom-line.
The industry’s asset quality, as measured by the
ratio of net non-performing loans to gross loans, deteriorated to four
per cent in March from 3.4 per cent in December.
This saw ratio of specific provisions to total NPLs
drop to 36.3 per cent from 40.9 per cent despite the provisions holding
steady at Sh50 billion.
The report says the banking industry’s pre-tax
profit rose 51.5 per cent to Sh25.5 billion from Sh38.4 billion in the
period, largely through cost-cutting measures.
“The growth in profitability is mainly attributable
to a higher decrease in total expenses by 8.5 per cent as compared to a
decrease in total income of 2.7 per cent in the quarter ended March
2016,” reads part of the report.
Individual banks have posted mixed results ranging
from losses, profit drops and earnings growth as most of them navigated a
pile-up of bad debts
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