Profits for commercial banks shrink by 5 per cent to Sh135 billion

NAIROBI, KENYA: Profits for commercial banks shrunk by 5 per cent to Sh134billion in 2015 in a disruptive year that saw two lenders placed under receivership.

The Bank Supervision Annual Report 2015 released Tuesday says that pre-tax profit for the sector decreased from Sh141.1 billion realised in the year ended December 2014.

The report attributes the decline in profitability to a faster growth in expenses compared to the growth in income.

The banks' income increased by 9.1 per cent in 2015 whereas expenses increased by a higher margin of 16.3 per cent over the same period, the report says.

The large seven banks now control 70.3 per cent of the total pre-tax profit, an increase from 61 per cent recorded in 2014. This has left the remaining 33 banks to fight for a third of the entire sectors profits.

"The increase is attributable to the movement of two banks to the large peer group and increase in the amount of profits made by banks in the large peer group," the report adds.

The top tier banks now include Kenya Commercial Bank (KCB), Co - operative Bank, Equity Bank, Barclays Bank of Kenya (BBK), Standard Chartered Bank, Commercial Bank of Africa (CBA) and Diamond Trust Bank (DTB).

When he took over at the Central Bank of Kenya (CBK), Dr Patrick Njoroge noted that he was looking at pushing banks to stop competing on profits at the expense of quality books. This saw several banks come under stress, booking huge provisions for non-performing loans, provisions that threw some into the loss making territory.

The ratio of gross non-performing loans to gross loans increased from 5.6 per cent in December 2014 to 6.8 per cent in December 2015.
"The increase in non-performing loans in 2015 was mainly attributable to delays in payments to suppliers and contractors, challenges in the business environment such as insecurity and adverse weather conditions and enhanced re-classification and provisioning," the report says.
Despite the slowdown in profits, they grew their balance sheets by 9.2 per cent in overall to Sh3.5 trillion in December 2015.
The report notes however that Kenya's banking sector shrugged off the slowdown in global economic growth, whose impact on the country 'was minimal due to the diversification of its' economy and a stable financial sector.'
The sector regulator said the growth to Sh3.5trillion was supported by increase in loans and advances driven by rising demand for credit by the various economic sectors.

In the year to December 2014,  the 43 banks combined had a total balance sheet of Sh3.2 trillion.

Gross loans increased by 11.5 per cent from Sh 1.9 trillion in December 2014 to Sh 2.1 trillion in December 2015.

But the placing of Dubai Bank and Imperial Bank under receivership in the second and third quarters of 2015 were the two main dark spots in the year.

Dr Njoroge said in the report that his actions were necessitated by unique circumstances in each of these banks.

"These actions were aimed at protecting the interests of the depositors, creditors and the wider public," Dr Njoroge said in his commentary.
He said following the collapse, it had commenced efforts to upgrade its supervisory regime and human resource capabilities.

It also asked auditors to assess the reliability of bank's information.

"The scope of external auditors of banks was expanded to require them to conduct additional work in assessing reliability of banks' information, communication and technology systems," CBK Governor Dr Patrick Njoroge said.
This is expected to deal with cover ups and under disclosing of material information that may have an impact on the financial health of banks in the country.

Customer deposits increased by 8.73 per cent from Sh2.29 trillion to Sh2.49 trillion.

"The growth was attributed to increased deposit mobilization by banks as they expanded their outreach and leveraging on mobile platforms to mobilise lower cost deposits," the report notes.

Going forward, the CBK says it will focus on greater transparency, which is supported by accurate data this year learning from past failures.

Njoroge says he will also work towards stronger governance with clear demarcation of responsibilities, greater accountability, fair market conduct and stronger supervision.

The third pillar of his transformation will focus on effective business models, aimed at strengthening the resilience of banks, reducing costs and supporting innovation.