Banks are estimated to have registered a drop in profitability by 30 per cent in what is turning out to be one of the worst half years for the country’s lenders.
An analysis of financial results for 28 banks, including all the big ones, shows that the industry’s net profit declined to Sh44 billion in the first half of 2020 from Sh62.9 billion in the same period last year, reflecting the negative effects of the Covid-19 pandemic.
Among the banks, Absa was the worst hit, with its profit after tax declining by 89 per cent.
KCB, the country’s largest bank by asset size, relinquished its pole position as the most profitable lender after its pretax profit declined by 40 per cent to Sh7.6 billion.
Equity Bank reported Sh9 billion profit for the half-year to take the leading position.
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NCBA, an amalgamation of what was formerly CBA and NIC Bank, saw its net profit decline by 39.5 per cent, while Diamond Trust Bank registered a 38.1 per cent with Stanbic and Equity registering a decline by 37.5 per cent and 14 per cent, respectively.
Co-operative Bank might have been the best performer among the big boys, with its net profit reducing by only four per cent.
As a result, most of the banks have been forced to dip into their revenues and put aside money as insurance against possible defaults by borrowers distressed by the pandemic.
This expense, known as loan loss provision, increased by more than three times to Sh42.8 billion from Sh13.4 billion in the same period in 2019.
Virtually all this insurance was from the 10 largest banks, whose loan loss provision added up to Sh39 billion.
A tough operating environment characterised by business closures and massive layoffs has seen borrowers either fail to pay loans or request for a change of terms.
Either way, banks have been forced to increase their buffer against possible defaults.
By end of June, banks had restructured loans worth Sh844.4 billion, nearly a third of the industry’s loan book, according to the Central Bank of Kenya (CBK).
Of the total loans restructured, individuals and households rescheduled Sh240 billion, CBK Governor Patrick Njoroge said.
The Monetary Policy Committee (MPC), the industry regulator’s highest decision-making organ has for the fifth consecutive month retained the benchmark lending rate at seven per cent.
“The committee noted that the package of policy measures implemented since March was having the intended effect on the economy, and will be augmented by the implementation of the measures in the financial year 2020/21 budget,” said Njoroge, who is also the MPC chair.
At seven per cent, the Central Bank Rate is at its lowest in nine years. Besides setting aside money for the restructuring of the loans, Joshua Oigara, the KCB chief executive said banks have also lost the fees they usually charge for changing credit terms.
This has in effect eaten into their profitability, with the nine largest banks all registering a drop in profits.
Christos Theofilou, sector analyst at Moody’s, a global credit rating company, noted that the coronavirus-related policy measures to promote loan restructurings will mitigate borrower stress this year.
“Nevertheless, the banks’ loan impairments anticipate accelerating NPL (non-performing loans) formation in 2021, especially among micro, small and midsize enterprises (MSMEs) and in stressed sectors such as tourism, hospitality and real estate,” he said. “The magnitude of the impairments points to a potential system-wide deterioration in NPLs.”
A few banks, mostly the small ones, registered growth in profit. However, the combined profit for 10 of these banks, Sh6.78 billion, was less than what Equity Bank (Sh9 billion) and KCB (Sh7.6 billion) made during this period.
Overall, Centum-owned Sidian Bank registered the biggest drop in profitability at 297 per cent. However, among the tier-one banks, Absa Bank was the poor performer with its net profits declining by 89 per cent.
Anticipating a tough business environment, banks such as Equity and NCBA recalled their dividend payouts as they sought to retain adequate firepower in case of a jump in bad loans.
Most of the banks have been drawing money from their revenue pots and putting it aside as insurance against possible defaults by borrowers.
Equity Bank beat KCB in the race to the pinnacle of profitability, registering a net profit of Sh9 billion in the first half of 2020 despite a growth in loan-loss provision of 769.6 per cent.
In the same period last year, the second largest bank by asset-size made a net profit of Sh11.9 billion.
Due to the coronavirus pandemic, there has been a surge in NPLs — loans which have not been serviced for more than three months.
Those who registered the highest growth in profits, small banks with few loan accounts and who were generally coming from a low base, did not have the hurdle of setting aside money for possible loan defaults.
The economy has generally not been doing well. The pandemic continued to devastate Kenyans in May, leaving even more without jobs, and millions at risk of being kicked out of their homes due to inability to pay rent.
A survey by the Kenya National Bureau of Statistics (KNBS) showed that the fraction of individuals absent from work due to Covid-19-related challenges surged in May as the pandemic continued to leave behind a trail of economic destruction.
For every 10 families that said they were out of work, six blamed Covid-19 for their unemployment, an increase from just about half in April. Another 15 per cent of the respondents cited temporary business closure.
With reduced incomes, many Kenyans struggled to pay rent, transport or even put food on the table, revealed the survey which looked at the impact of the pandemic on health, labour market, transport costs and housing.
Almost half of the respondents who were surveyed by the national statistician between May 2 and 9 were self-employed, while 35 per cent were paid employees.
Already, economists and policymakers have projected that the economy will take a major hit from the pandemic, with the World Bank and IMF forecasting the national output to contract for the first time in 20 years.
But National Treasury Cabinet Secretary Ukur Yatani insists the economy might grow at 2.5 per cent. Bank stocks, however, have been among the top counters at the Nairobi Securities Exchange (NSE) during this period.
Besides Safaricom, Equity, KCB and Stanbic counters have distinguished themselves as some of the star performers at the bourse since April.