Sh 27 billion bad loan cut helps boost banks’ profits
- The eight senior lenders reduced their loan loss provisioning costs by up to 39%, underscoring the supernatural profits posted by most of them.
- Equity Group posted after-tax profit of 26.8 billion shillings, a growth of 78.6% while StanChart’s net profit jumped 46.6% to 6.3 billion shillings.
- CBK statements show that during this period, non-performing loan (NPL) ratios have consistently declined from 14.5% in February to 13.9% in August and 13.6% in October.
Major banks saved up to 27.2 billion shillings in the nine months to September thanks to falling costs of processing defaults as borrowers resumed payments after months of freezing.
The eight senior lenders reduced their loan loss provisioning costs by up to 39%, underscoring the supernatural profits posted by most of them.
KCB Bank #ticker: KCB achieved the biggest savings of Sh10.6 billion, followed by Equity Bank #ticker: EQTY which saved Sh9.6 billion. Absa Bank #ticker: ABSA and NCBA #ticker: NCBA each saved 4.1 billion shillings and Standard Chartered #ticker: SCBK 48 million shillings.
Among the major lenders, only Cooperative Bank #ticker: COOP and I&M Bank, which increased provisioning for bad debts by Sh2 billion and Sh735 million respectively, reversed the trend.
Savings from loan loss provisioning propelled banks to triple-digit profit growth, with KCB posting 131.1% to Sh 25.1 billion and Absa Bank Kenya’s net income increasing by 328.2 % to Sh 8.2 billion.
Equity Group posted after-tax profit of 26.8 billion shillings, a growth of 78.6% while StanChart’s net profit jumped 46.6% to 6.3 billion shillings.
The reduction in the allowance for loan losses reflects the gradual resumption of debt repayment after the CBK lifted the one-year freeze on loan principal,
interest and term extension that saw borrowers restructure the debt of 1.7 trillion shillings.
CBK statements show that during this period, non-performing loan (NPL) ratios have consistently declined from 14.5% in February to 13.9% in August and 13.6% in October.
âBanks have made an accounting profit on pension losses. We don’t see a lot of business on the balance sheet, with private sector lending growing 7.4% this year versus 8.1% last year, âsaid George Bodo, analyst at Gengis Capital.
The banks took a conservative approach last year and set aside billions of shillings. Provisions for loan losses rose 45.8% as banks sought to hedge against deteriorating asset quality during the year.
Now, with the huge war chest to safeguard bad debts, banks have sorted out their legacy problems and can now rake in more profits from increased lending while pursuing defaulters.
A review of financial data from major banks in the third quarter shows that the rise in lender profits is due to reduced costs rather than an increase in lending, especially the cost of insurance for bad debts.
Banks with disproportionate profits lowered their provisioning levels, reflecting the improved operating environment compared to a similar period last year.
Kenya’s economy grew 10.1% in the second quarter of the year thanks to a rebound in economic activity compared to a similar period last year when strict Covid-19 containment measures resulted in a contraction of 4.7%.
Going forward, however, lenders will also need to find a new growth strategy that may require them to lend back to the economy.
Banks hope that they can resume their loans with the confidence of public and private credit guarantee schemes for small businesses and that increased application of loan collection will help recover the value of their huge portfolio of non-performing loans.
Many companies, including aluminum products maker Kaluworks Limited, cookie maker Britania Foods and retailers Nakumatt and Tuskys, have been placed under administration or are being liquidated by lenders as property auctions have increased.
Analysts warn, however, that bank optimism does not reflect Covid-19’s continued threat of new variants and political tensions as the general election approaches next year.
âBanks are forecasting a healthy loan portfolio with cutbacks in provisions but the worst is yet to be over with Covid-19 overwhelmed and next year being an election year,â Mr Bodo said.
Kenya’s economy slowed during election years, when companies put their investment decisions on hold pending a return to normal in the political landscape.
Economic growth, for example, slowed to 4.81% in 2017 following the hotly contested presidential election, from 5.88% a year earlier.
The same trend was observed in 2008 when the aftermath of the deadly presidential election in December 2007 sent the economy down to 0.23% growth from 6.865% the previous year. The notable exception was in 2013 when the economy grew 5.8% after the Supreme Court amicably resolved a presidential dispute, up from 4.56% the year before.