Top banks set aside Sh31bn for loan defaults

Central Bank of Kenya Governor Patrick Njoroge. FILE PHOTO | NMG 

By VICTOR JUMA
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Summary

• The figures are an early indication of the damage the crisis is expected to inflict on lenders who for years have reported double-digit growth in profits and paid handsome dividends.
• The economic fallout brought by the pandemic, including forecasts of a mere one per cent growth in real GDP this year, has seen a sharp rise in provisions for ongoing and anticipated defaults.
• Beginning January 1, 2018, banks have been required to make provisions for expected loan losses rather than those already incurred following the adoption of the more conservative International Financial Reporting Standards (IFRS 9).

Kenya’s top seven banks listed on the Nairobi Securities Exchange (NSE) have set aside Sh31.7 billion in the half year ended June for an expected increase in bad loans as restrictions to combat Covid-19 raise the spectre of large-scale defaults.

The provisions, which rose by a combined Sh22.8 billion in the review period from Sh9 billion a year earlier, represent the amounts banks expect to lose from lending to households and corporates.

The figures are an early indication of the damage the crisis is expected to inflict on lenders who for years have reported double-digit growth in profits and paid handsome dividends.

Already, the Central Bank of Kenya (CBK) has ordered banks to seek its approval before declaring dividends for the current financial year, a directive focused on ensuring lenders have enough capital to ride out the Covid-19 pandemic.

The provisions for bad loans cut the lenders’ net earnings by a third to Sh32.5 billion, making it the dominant factor in determining their profitability following the pandemic, overshadowing growth in interest income and fees on transactions.

KCB Group

, Equity Group and Absa Bank Kenya

are among the lenders that raised their provisions for bad debt by the largest amounts at Sh7.9 billion, Sh7.1 billion and Sh3.7 billion respectively.

This indicates their relatively higher exposure to coronavirus-battered sectors, including trade and tourism.

The analysis excludes NCBA Group

whose results do not give like-for-like comparison after the merger of NIC and CBA in September last year.

Beginning January 1, 2018, banks have been required to make provisions for expected loan losses rather than those already incurred following the adoption of the more conservative International Financial Reporting Standards (IFRS 9).

Higher provisions have the effect of hitting the bottom-line while eroding the capital base.

The economic fallout brought by the pandemic, including forecasts of a mere one per cent growth in real GDP this year, has seen a sharp rise in provisions for ongoing and anticipated defaults.

KCB reported the largest absolute rise in provisioning of Sh7.9 billion to Sh11 billion in the review, sending the net earnings of the country’s largest bank down 40.4 per cent to Sh7.5 billion.

The ramp-up in provisioning overshadowed KCB’s robust earnings from the mainstay lending business which saw net interest income jump 22 per cent to Sh31.1 billion.

The bank is one of the most diversified, with a presence in corporate, SME and retail banking.

The performance saw the bank go into capital-preservation mode, suspending interim dividends in a decision that saved it an aggregate of Sh3.2 billion based on its previous payout of Sh1 per share.

Equity was second, hoisting its provisions by Sh7.1 billion to Sh8 billion, playing the decisive factor in the lender’s 24.3 per cent net profit drop to Sh9 billion.

Equity, in anticipation of weaker earnings due to the impact of coronavirus, in May, cancelled its proposed dividend of Sh9.4 billion or Sh2.5 per share for the year ended December 2019.

The bank is also well diversified, serving large companies, SMEs and retail customers.

Absa’s provisions increased by Sh3.7 billion to Sh5.3 billion, resulting in an unprecedented 85 per cent net earnings fall to Sh588.9 million.

The bank’s chief financial officer Yusuf Omari told the Business Daily that out of the provisions, Sh3 billion represents the general weak economic outlook due to the Covid-19 pandemic.

“We are making provisions even for loans that are still performing. The amount could reverse if the pandemic is contained and economic activities pick up,” Mr Omari said.

He added that other provisions were caused by defaults among a few large corporate customers.

Absa is strong in corporate banking, harking back to its previous status as a subsidiary of Barclays Plc, which was one of the few global banks that operated in Africa. The lender also broke its long tradition of paying interim dividends, saving Sh1 billion based on its usual payout of Sh0.2 per share.

DTB Group’s

provisions more than tripled to Sh1.8 billion, cutting net profit 38.1 per cent to Sh2.4 billion. The bank has SMES as its core customer base.

Standard Chartered Bank Kenya’s

provisions more than quadrupled to Sh1.6 billion, lowering its net earnings 31.2 per cent to Sh3.2 billion. The lender also skipped interim dividends, retaining Sh1.8 billion based on its previous payout of Sh5 per share.

Provisions at Stanbic Holdings

rose 60.6 per cent to Sh1.9 billion, contributing to its net earnings falling by a similar margin to Sh2.5 billion.

Co-operative Bank’s

provisions rose 57.8 per cent to Sh1.9 billion but the lender’s net profit declined by the smallest margin of 3.6 per cent to Sh7.1 billion as higher net interest income provided a cushion