The profitability of the country’s banks dropped by a third in the first six months of this year, slicing off a sizable chunk of the bank owners’ returns.
A new Central Bank of Kenya (CBK) report shows that banks registered a profit before tax of Sh60 billion by June 2020, down from Sh85.8 billion in the same period last year.
This had the effect of bringing down shareholders’ earnings on their investments or return on equity - by the same 33 per cent.
Due to the drop in profitability, return on equity, the fraction of profits to shareholder funds, declined to 7.8 per cent from 12 per cent in June last year.
This pointed to meagre or no dividends at the end of the financial year. And in the case of listed bank stocks, it was poor earnings per share. This means that for every Sh100 that shareholders have invested in banks, they got around Sh8 compared to Sh12 in June last year.
Analysts have attributed the reduced profitability to the adverse effects of Covid-19, which saw banks set aside huge funds as insurance against possible defaults by distressed borrowers.
Most of the provisioning was for loans that had been restructured as individuals and firms negatively impacted by Covid-19 sought some breathing space in their loan repayments.
Towards the end of September CBK Governor Patrick Njoroge announced the end of emergency measures which banks had been implementing, including rescheduling the repayment dates for borrowers distressed by the pandemic. By then, banks had restructured Sh1.13 trillion worth of loans.
Banks have also had to forego fees on mobile transactions as part of emergency measures aimed at reducing the spread of Covid-19 through contact of banknotes and coins.
Failure to collect such fees has reflected in the drop in non-funded income, and ultimately the drop in profits during this period. A drop in profitability has also been reflected at the counters of listed lenders at the Nairobi Securities Exchange (NSE).
Earnings per share for banks listed at the bourse underperformed that of their peers in front-markets, according to a report by EFG Hermes, a financial service provider.
The average share price of Kenyan banks, noted the report, had fallen 31.6 per cent year-to-date by October 27, compared to a drop of eight per cent for the rest of the frontier banks that the authors analysed. This underperformance, noted the authors, was despite Kenya’s relatively stronger macro-economic performance; modest number of Covid-19 cases and deaths as well as the less severe lockdowns.
The investment bank reckons that Kenya’s inventory of bad loans might have been worse before the outbreak of Covid-19. During the period under review in the CBK report, the stock of non-performing loans (NPLs) surged to Sh382 billion from Sh339.5 billion in June last year.
NPLs as a fraction of total loans stood at 13.1 per cent. But this has since gone up to 13.6 per cent in August as borrowers continued to struggle to repay. The negative effects of Covid-19 have led to unemployment for NCBA Bank employees, with the lender announcing it will lay off some workers.
“Today, I announce that we are embarking on a process to reorganise our workforce, which will result in reduction of staff headcount,” said NCBA Managing Director John Gachora in a statement to staff.
Analysts expect KCB, which had also merged with NBK, to follow suit. However, the biggest driver for the impending re-alignment in the banking sector, according to analysts, will be Covid.