The Central Bank of Kenya spared lenders from charging increased
loan-loss provisions in their income statements in the first year of the
IFRS 9 regime (January 1 to December 31). FOTOSEARCH
Kenya’s top banks have posted impressive profits for 2018,
benefiting from the Central Bank’s one-year earnings “protection” window
in the implementation of the International Financial Reporting Standard
(IFRS 9) which demands higher provisioning for bad loans.
Analysts
had predicted that the banks would report nearly flat revenue
performance in the face of declining credit to the private sector and
growth in non-performing loans.
An analysis of the 2018
financial results of top commercial banks shows that although all the
banks maintained profitability, the situation would have been different
if the loan-loss provision coverage had taken full effect in January.
The
Central Bank of Kenya spared the lenders from charging increased
loan-loss provisions in their income statements in the first year of the
IFRS 9 regime (January 1 to December 31, 2018), a move that has seen
banks record lower expenses while pushing up profits.
CBK
allowed banks to charge their increased loan-loss provisions against
the retained earnings in the balance sheet and not in the
profit-and-loss account, sparing them a drastic dip in profits.
Industry sources told The East African
that this year things are likely to be difficult for the banks as they
will have to charge all their increased loan-loss provisions to the
profit-and-loss account.
“Last year we had a window to manage our profit and loss
account, but that window has closed and therefore this year we have to
charge all our loan-loss provisions against our profit-and-loss
account,” a banker who did not want to be named said.
Under
the IFRS9, which replaced the International Accounting Standard (IAS)
39, banks are expected to provide for projected loan losses rather than
those already incurred, thereby reducing their profitability and eroding
their capital base.
The CBK gave Kenyan lenders a
five-year transition period to shore up their capital bases in
compliance with the new accounting standard.
Analysts
estimated that the capital bases of the lenders would drop by close to
Ksh20 billion ($200 million) when the rules took effect.
The
implementation of IFRS 9 is expected to impact the profitability and
capital positions of lenders, since banks will have to set aside greater
provisions for expected credit losses.
Figures from
the Central Bank, show that the volume of bad loans in Kenya’s banking
industry increased by Ksh63.8 billion ($638 million) to Ksh298.4 billion
($2.98 billion) in June 2018, from Ksh234.6 billion ($2.34 billion) in
June 2017, largely blamed on delayed payments by government agencies and
the private sector, business stagnation and a slow uptake of housing in
the real estate sector.
But the banks reduced the loan
loss provisioning by 25 per cent to Ksh12 billion ($120 million) in
June 2018, from Ksh16 billion ($160 million) in June 2017, thereby
boosting profitability by 9.8 per cent to Ksh76.2 billion ($762 million)
from Ksh69.4 billion ($694 million).
A review of the
top banks’ financial statements shows significant reduction in loan loss
provisions in the income statements, with weakening performance of
various revenue streams as a result of controlled lending rates and low
economic activities.
According to the reports KCB, the
largest lender by assets, posted a 22 per cent growth in net profit to
Ksh24 billion ($240 million), from Ksh19.7 billion ($197 million) in
2017.
The lender reduced its loan loss provision by
more than half to Ksh2.9 billion ($29 million), from Ksh5.9 billion ($59
million), and excluded a one-off restructuring cost of Ksh2 billion.
Its
revenue performance remained flat at Ksh23 billion ($230 million) as a
result of a decline in foreign exchange income and on fees and
commissions charged on banking transactions.
“Looking
ahead, we expect our performance in 2019 to be driven by renewed
investor confidence and a rebound in the East African economy,” said KCB
Group chief executive Joshua Oigara.
Co-operative Bank
of Kenya reduced its loan loss provision by 49 per cent to Ksh1.84
billion ($18.4 million) from Ksh3.6 billion ($36 million), despite its
volume of total NPLs increasing by 41 per cent (Ksh7 billion, $70
million) to Ksh25.2 billion ($252 million) from Ksh17.81 billion ($178.1
million).
Its total operating income rose marginally
by five per cent (Ksh2 billion, $20 million) to Ksh43.67 billion ($436.7
million) from Ksh41.59 billion ($415.9 million).
The
bank’s net earnings grew by 11 per cent to Ksh12.73 billion ($127.3
million) from Ksh11.4 billion ($114 million), with its South Sudan
subsidiary making a loss of Ksh 30.78 million ($307,800) due to
hyperinflation occasioned by devaluation of the South Sudanese Pound.
Standard
Chartered Bank Kenya reduced its loan loss provisions to Ksh1.93
billion ($19.3 million) from Ksh4.18 billion ($41.8 million), pushing up
its profit to Ksh8.09 billion ($80.9 million) from Ksh6.91 billion
($69.1 million).
Its total NPLs increased to Ksh13.87
billion ($138.7 million) from Ksh11.31 billion ($113.1 million) while
total operating income increased to Ksh28.59 billion ($285.9 million)
from Ksh27.33 billion ($273.3 million).
Diamond Trust
Bank’s net earnings rose four per cent to Ksh6.68 billion ($66.8
million) from Ksh6.44 billion ($64.4 million), with loan loss provision
declining to Ksh2.98 billion ($29.8 million) from Ksh4.3 billion ($43
million).
Total NPLs and advances fell to Ksh12.14 billion ($121.4 million) from Ksh13.05 billion ($130.5 million).
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