KCB Group CEO Joshua Oigara. FILE PHOTO | NMG
KCB Group posted a 43.1 percent decline in net profit for the first nine months of trading, putting the region’s largest lender in unfamiliar territory.
Group CEO Joshua Oigara spoke to the Business Daily on the impact that Covid-19 has had on the business, the challenges and opportunities amid the pandemic as well as the prospects of paying dividends.
KCB has increased loan loss provisioning 3.4 times, leading to a 43 per cent fall in net profit. Does this mean that you expect the economic hardships facing borrowers to take a long time to clear?
The Covid-19 pandemic has had a catastrophic impact on a number of macro-economic drivers.
The customer profile in areas such as hotels, aviation, transport and education has been hurt and this is going to take longer to recover especially with the resurgence in infections. We see a deterioration in credit quality across segments and some businesses will not be able to come out of this pandemic with the ability to honour obligations. The increased loan loss provision points to our view that the economic environment is going to be difficult.
You have so far restructured loans valued at Sh105 billion. Are there risks for repeat requests for loan restructurings as the virus continues to batter the economy?
We are seeing a lot of customers struggling and we are not certain that this is going to change even beyond the first half of 2021.
We have seen some of our clients say they need an additional one year or 18 months from September (to resume loan repayments). That is a long time. For most of those requests, we are extending them for another six months and that will take us into the first quarter of 2021. This is a year of survival. This is not a year to thrive. It is a year to try and hold your business and support customers.
How much of a strength is it to see your net interest income up 24 per cent during this challenging period?
That is an extremely strong performance. There are some segments which are very good for us such as consumer lending and check-off loans as well as some of our clients in the manufacturing sector.
The organic business and the fundamentals of revenues are still strong but when you think about the crisis and the impact on businesses, it shows that many customers will not be in a position to honour obligations.
If we isolate international financial reporting standards (IFRS 9) as a key issue for loan loss provisions for the pandemic, there is an upside in the performance. Customer deposits are up 31.7 per cent in the middle of economic hardships due to the pandemic. Why the surge?
Several factors are at play. By digitising the transactions from March, we have seen an addition of two million clients adopt our mobile channels for deposits.
The rise is also due to the removal of charges on transactions and also given that there is now a higher limit to transact. Transactions on our mobile channel is up six times year-on-year. The government has also invested a lot of funds to support economic activities in this difficult period and those funds are coming to a number of our clients.
The deposits of our new bank [National Bank of Kenya] have also contributed to the rise.
Are customers taking advantage of this period to lock money in interest-bearing accounts?
A lot of customers are bringing in deposits but they are not using it for any economic activities. Lending is not as high and so the deposits are sitting with us much longer.
Digital loans had been touted to grow strongly as economic hardships push customers to seek short-term borrowing for consumption and survival. This hasn’t happened. Why?
Our mobile loan disbursements have dropped by 50 percent. We were doing Sh10 billion a month but we are now below Sh5 billion. The reason is that most of our customers who borrow lost their income—whether it was someone doing bodaboda, some work at home or running a small firm.
So our levels of non-performing loans for this product increased from two percent to 15 percent in the second and third quarters of the year.
Unless our loss ratio is below three percent, then this product is not profit making for us.
How much of an impact to digital loans was it for CBK to freeze listing of small defaulters on the credit reference bureaus (CRBs)?
Without the ability to list anybody on the CRB, then there was no motivation for the customers to pay. This was a very difficult measure and it contributed to us reducing the lending.
Without listing, there is no impetus for the customer to pay a facility, especially that these are mostly digital clients that have only come through a network and we haven’t met them physically. But now that we are in a position to start notifying CRBs, we are likely to see lending start growing from this quarter four.
You are in an unfamiliar territory of 43 per cent decline in net profit in the third quarter of the year. Is recovery coming in this last quarter?
I am more optimistic about quarter one and two of next year but now because of the rising infections, quarter four remains a period of trying to stabilise. The first half of 2021 may see strong growth in areas such as non-interest income.
Given your performance at Q3 and the CBK guidance on dividends, what sort of decisions are you looking at for 2020?
We didn’t announce an interim dividend and for the final dividends, it is an issue that will wait until the first quarter of 2021.
Our priority is to preserve our cash resources as we look at the options for supporting customers during the crisis.
KCB Group posted a 43.1 percent decline in net profit for the first nine months of trading, putting the region’s largest lender in unfamiliar territory.
Group CEO Joshua Oigara spoke to the Business Daily on the impact that Covid-19 has had on the business, the challenges and opportunities amid the pandemic as well as the prospects of paying dividends.
KCB has increased loan loss provisioning 3.4 times, leading to a 43 per cent fall in net profit. Does this mean that you expect the economic hardships facing borrowers to take a long time to clear?
The Covid-19 pandemic has had a catastrophic impact on a number of macro-economic drivers.
The customer profile in areas such as hotels, aviation, transport and education has been hurt and this is going to take longer to recover especially with the resurgence in infections. We see a deterioration in credit quality across segments and some businesses will not be able to come out of this pandemic with the ability to honour obligations. The increased loan loss provision points to our view that the economic environment is going to be difficult.
You have so far restructured loans valued at Sh105 billion. Are there risks for repeat requests for loan restructurings as the virus continues to batter the economy?
We are seeing a lot of customers struggling and we are not certain that this is going to change even beyond the first half of 2021.
We have seen some of our clients say they need an additional one year or 18 months from September (to resume loan repayments). That is a long time. For most of those requests, we are extending them for another six months and that will take us into the first quarter of 2021. This is a year of survival. This is not a year to thrive. It is a year to try and hold your business and support customers.
How much of a strength is it to see your net interest income up 24 per cent during this challenging period?
That is an extremely strong performance. There are some segments which are very good for us such as consumer lending and check-off loans as well as some of our clients in the manufacturing sector.
The organic business and the fundamentals of revenues are still strong but when you think about the crisis and the impact on businesses, it shows that many customers will not be in a position to honour obligations.
If we isolate international financial reporting standards (IFRS 9) as a key issue for loan loss provisions for the pandemic, there is an upside in the performance. Customer deposits are up 31.7 per cent in the middle of economic hardships due to the pandemic. Why the surge?
Several factors are at play. By digitising the transactions from March, we have seen an addition of two million clients adopt our mobile channels for deposits.
The rise is also due to the removal of charges on transactions and also given that there is now a higher limit to transact. Transactions on our mobile channel is up six times year-on-year. The government has also invested a lot of funds to support economic activities in this difficult period and those funds are coming to a number of our clients.
The deposits of our new bank [National Bank of Kenya] have also contributed to the rise.
Are customers taking advantage of this period to lock money in interest-bearing accounts?
A lot of customers are bringing in deposits but they are not using it for any economic activities. Lending is not as high and so the deposits are sitting with us much longer.
Digital loans had been touted to grow strongly as economic hardships push customers to seek short-term borrowing for consumption and survival. This hasn’t happened. Why?
Our mobile loan disbursements have dropped by 50 percent. We were doing Sh10 billion a month but we are now below Sh5 billion. The reason is that most of our customers who borrow lost their income—whether it was someone doing bodaboda, some work at home or running a small firm.
So our levels of non-performing loans for this product increased from two percent to 15 percent in the second and third quarters of the year.
Unless our loss ratio is below three percent, then this product is not profit making for us.
How much of an impact to digital loans was it for CBK to freeze listing of small defaulters on the credit reference bureaus (CRBs)?
Without the ability to list anybody on the CRB, then there was no motivation for the customers to pay. This was a very difficult measure and it contributed to us reducing the lending.
Without listing, there is no impetus for the customer to pay a facility, especially that these are mostly digital clients that have only come through a network and we haven’t met them physically. But now that we are in a position to start notifying CRBs, we are likely to see lending start growing from this quarter four.
You are in an unfamiliar territory of 43 per cent decline in net profit in the third quarter of the year. Is recovery coming in this last quarter?
I am more optimistic about quarter one and two of next year but now because of the rising infections, quarter four remains a period of trying to stabilise. The first half of 2021 may see strong growth in areas such as non-interest income.
Given your performance at Q3 and the CBK guidance on dividends, what sort of decisions are you looking at for 2020?
We didn’t announce an interim dividend and for the final dividends, it is an issue that will wait until the first quarter of 2021.
Our priority is to preserve our cash resources as we look at the options for supporting customers during the crisis.
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