Banks build Sh31b war chest for bad loans amid living cost crisis

Kenya’s biggest banks have collectively set aside Sh30.9 billion for loan losses in the last six months as concerns about an economic slowdown in the country and higher defaults among businesses and individual borrowers mount.

Analysis of financial statements of top commercial banks for the half year ended June by Weekend Business reveals that a majority of the tier-one lenders have ratcheted up credit loss reserves by billions of shillings in response to heightened economic and credit market uncertainty.

The share of loan defaults increased to Sh592.6 billion as of May this year, pointing to a cash crunch in the economy that could set up thousands of borrowers for property seizures.

The mounting defaults are a reflection of the struggles that Kenyans are undergoing in an economy that has witnessed a string of job losses in recent months across nearly all sectors as companies intensify austerity measures to protect profits.

Our analysis of the financial results of the lenders that have so far released their half-year performance shows that they have set aside more funds in the period to June this year to guard against loan losses.

Other lenders, however, remain bullish and have not raised their provisions but instead lowered them as they believe their loans are performing.

Bank profits surged last year to record highs as the reduced impact of the Covid-19 pandemic resulted in resurgent economic growth and allowed banks to shrink huge loan loss reserves they had set aside at the onset of the pandemic. But profits have shrunk or grown by fewer margins in the last six months as banks became less aggressive in reducing those cushions, while some larger lenders are reversing course and rebuilding them, further eating into potential profits.

The majority of the lenders now believe a turbulent macroeconomic environment characterised by sticky inflation, high interest and the depreciation of the shilling against the dollar justifies the need for caution and prudence in provision.

Equity Group, Kenya’s largest bank by customer base, said its provisions grew by more than Sh3 billion in the first half of this year to Sh7 billion from Sh4 billion a year earlier. The 73.61 per cent growth in provisions came as the lender’s gross non-performing loans grew by more than half to Sh97.5 billion as of June 30, 2023.

KCB Group, on the other hand, said its profit after tax for the year was greatly impacted by aggressive provisioning on facilities in KCB Kenya.

The lender provisions more than doubled to Sh10.1 billion, or a staggering Sh5.8 billion, as its dud loans jumped by 4.9 per cent to hit Sh181 billion.

The Group singled out higher loan loss provisions on unnamed foreign currency-denominated credit facilities on account of a challenging operating environment.

“Despite a challenging economic environment across our operating markets, the business remained resilient delivering a strong balance sheet and increased contribution from regional businesses,” said KCB Group CEO Paul Russo.

“Profitability was under pressure in the first half from increased funding costs on higher market deposit rates, prudent provisioning on legacy credit facilities, and provisions for legacy legal claims at NBK.”

Stanbic Holdings said its credit impairment charges nearly more than doubled in the half-year period to Sh2.4 billion.

I&M Group also said its provisions in the six-month period more than doubled to Sh3.2 billion as its bad loans hit Sh36.6 billion from Sh23.3 billion a year earlier.

Diamond Trust Bank (DTB) said its provisions in the period grew by more than a third to Sh3.25 billion.

During the half-year period, Standard Chartered Bank Kenya said its provisions grew by nearly Sh1.92 billion to Sh2 billion as its bad loans jumped 4 per cent to Sh 23.7 billion.

Family Bank, on the other hand, saw provisions jump by more than half to Sh562 million in the half-year period. Central Bank of Kenya (CBK) Governor Kamau Thugge recently warned banks to brace for mass defaults through more provisions as bad loans remain a sore thumb in the banking industry.

Banks have been facing ever-rising loan defaults, after the onset of Covid-19 in March 2020, which affected millions of households as their incomes dropped and businesses ground to a halt.

According to the CBK, the ratio of gross non-performing loans (NPLs) to gross loans stood at 14.5 per cent in June 2023 compared to 14.9 per cent in May.

“Decreases in NPLs (non-performing loans) were noted in the transport and communication, agriculture, manufacturing, and personal and household sectors,” said Dr Thugge during the recent Monetary Policy Committee meeting.

“Banks have continued to make adequate provisions for the NPLs.”

Banks with high levels of non-performing loans are also unable to lend to households and companies. This is harmful to the economy as a whole. When granting loans to their clients, banks always expose themselves to credit risk – the risk that the borrower may not pay back the loan. When this happens, the loan is said to become non-performing.

A loan becomes non-performing when the bank considers that the borrower is unlikely to repay or when the borrower is 90 days late on a payment.

Growth in private sector credit slowed to 12.2 per cent in June 2023 compared to 13.2 per cent in May as banks cut back lending of default risks fears. The National Treasury recently warned that CBK’s fight to rein in inflation could tip the battered economy into a temporary recession. The warning came when CBK attempted to squeeze high inflation out of the economy through the toughest round of rate increases in recent years.

Treasury Cabinet Secretary Njuguna Ndung’u said recently despite its unintended risks of slowing the economy, the fight against inflation is a necessary evil.