Although Covid-19 pandemic has hit the entire banking sector equally, a few banks have emerged as more equal than others.
Consequently, financial results that lenders have been churning out in the last two quarters have presented observers with what would better be described as “a great study in contrast.”
Already, banks such as NCBA and Standard Chartered, anticipating a difficult 2021 have slashed their workforce even as they prepared to replace them with technology.
Others such as Co-operative Bank have unveiled a paperless account-opening process that besides offering convenience to customers, will also help curb the spread of coronavirus by avoiding face-to-face interaction.
Generally, an analysis of leading banks, reveals surprising results where institutions that had for long been regarded as models of cost management, reported dramatic declines in performance relative to their peers.
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Of the seven tier-one banks, NCBA and Absa suffered the most drops in profitability in the first nine months of 2020. The two banks reported a drop in profit before tax by 65 per cent and 59 per cent, respectively.
KCB’s profit before tax dropped by 37 per cent, Standard Chartered (28 per cent), DTB (24 per cent), Equity (20 per cent) and Co-operative Bank by 11 per cent.
NCBA and Absa seem to have been hit the hardest due to their client focus and outsized exposure to mainstream corporate business, which is the market segment that has been most hit by Covid-19 shutdowns.
On the other end, KCB and StanChart had to set aside a lot money as insurance against defaults as a consequence of being at the heart of Kenya’s large private sectors, including transport, hospitality, trade and horticulture. Unfortunately, these sectors have borne the brunt of severe Covid-19 disruptions.
DTB and Equity concentrate mostly on SMEs and consumer lending, which appear to have braved the disruption with reasonable success, and may be on a recovery path following the easing of lockdowns and related measures.
The difference in profitability lies in loan-loss provisioning, money that lenders set aside as insurance against possible loan defaults.
However, the level of Covid-19-related provisioning that banks have undertaken to offer relief to their stricken borrowers has also exposed the efficiency, or lack of it, of existing credit risk analysis tools, according to a bank official who asked for anonymity as they are not allowed to speak to press.
“That some banks had to provide for nearly entire loan books while their peers did modest provisions should be a back-to-school moment for all credit professionals,” said the source.
Such shocks, also known as black swans, always lead to tightening of controls, with adverse effects on access to credit and financial inclusion.
If the pandemic is to be regarded as the typical “black swan” event, then the bank financial results for the latest quarter should send alarm bells ringing for both shareholders of the various banks, and especially the bank regulator.
Gerald Muriuki, a researcher at investment firm Genghis Capital, noted that there have been different applications of what the current situation means.
“There are banks which have been aggressive in terms of provisioning,” said Muriuki.
“There are banks that are looking at as a credit risk problem; others are looking at it as a temporary cash-flow problem.”
Equity CEO James Mwangi when releasing the half year results, said the Covid-19 pandemic has mutated into a global economic crisis, occasioned by a sudden standstill of economic activity as a result of lockdowns to curb the spread of the deadly disease.
“This has introduced unprecedented uncertainty within the global financial systems prompting us to adopt a conservative approach, fortifying our balance sheet and assuring ample liquidity to support our customers,” said Mr Mwangi.
As a result, Equity was forced to recall a Sh9.5 billion dividend payout the board had proposed to be paid to shareholders.
Equity was to pay a final dividend of Sh2.50 for every ordinary share for the year ending December 31, 2019.
However, following the adverse economic effects of coronavirus, the second-largest bank in the country decided to withdraw the plan.
“The Equity Group Holdings Board took a conservative approach that recognises the emerging unquantified risk of the pandemic and opted to preserve capital in the face of the prevailing uncertainty,” said Mwangi.
“A strong capital and liquidity position gives us the strength and capacity to cushion our business and accommodate and walk with our customers during these challenging times.”
Carolyne Gathinji, the associate partner with McKinsey & Company in Nairobi, noted that for emerging economies like Kenya one of the most formidable challenges facing banks will be credit losses.
“Kenya has seen a rise in provisioning over the last two quarters; and banks have restructured around 47 percent of their loans, worth Sh1.38 trillion, to alleviate the impact on borrowers and shield future income.
This is likely to get worse in early 2021 before starting on the path to recovery,” said Gathinji, adding that Kenyan banks have partially mitigated the revenues drop through gains on the government securities.
According to Gathinji, as banks start the uphill climb back towards pre-crisis return on equity (ROE), they will need to pull on three levers: increasing revenues, managing costs, and better managing their equity capital.
“The burden of proof will therefore lie in how they are able to manage costs and leverage digital channels going forward.”
NCBA and Standard Chartered have also recalled their dividends for the financial year ending 2019. KCB Bank for its part cancelled its interim dividends in the first half of the year. However, Co-operative Bank paid Sh5.9 billion in dividends.
NCBA, the third-largest bank by market size, has also communicated to its employees that it will be laying off an unspecified number of employees by the end of the year.
Reorganising NCBA’s workforce, the bank’s managing director John Gachora noted, is meant to protect the future of the company.