Banks survive a creeping economy with no losses

By Jackson Okoth

The local banking industry may have survived a creeping economy as signs of recovery begin to appear in the horizon.

"Although the banking sector has taken a beating from the global financial crisis, no losses have been reported. We expect banks to have a healthy position in the fourth quarter," Njuguna Ndung’u, Central Bank of Kenya (CBK) governor told a media briefing, last week.

Strong growth

He said this resilience was due to a banking industry that is not fully integrated with international financial markets.

"Although the economy has slowed down in general, we have been able to ride on the previous strong growth momentum. We expect the fourth quarter to be better as onset of rains lower cost of power and inflation falls," Martin Oduor-Otieno said while announcing the bank’s third quarter earnings.

This positive outlook is shared by an optimistic industry with expectations running high that the last quarter would be the best for many.

However, fund managers caution that some of the big lenders could record further decline in earnings in the last quarter should the economy fail to pick.

The lending environment could also worsen for those banks with a strong presence in the corporate segment, as businesses shun loans due to accumulated raw material or finished goods inventories.

Apart from Standard Chartered Bank, which appears to have remained resilient, Kenya Commercial Bank (KCB), Barclays Bank of Kenya (BBK) and Co-operative Bank all made marginal increases in profits during the third quarter.

Equity Bank and CFCStanbic have reported a drop in third quarter earnings.

" We do not expect performance in the fourth quarter to be as impressive. This is as provisions on loans rise in compliance with CBK requirements," said Vimal Parmar, an analyst at African Alliance Kenya Securities.

Pre-tax profits

SCB posted a 46 per cent increase in pre-tax profits in the third quarter compared to BBK which recorded a 4.7 per cent increase in pre-tax profit to Sh6.6 billion from Sh6.3 billion the previous year.

Co-operative Bank’s pre-tax profit rose by 10 per cent while KCB had a 1 per cent increase in pre-tax profits in the third quarter.

"We have seen the non-funded income for most banks continuing to come down. Similarly, the cost-income ratio for those banks operating in the region has remained high," said Parmar.

Retailers Equity Bank and KCB remain the biggest players in the East African region.

However, most of these regional branches, especially those in South Sudan are yet to contribute to the group balance sheet of Equity or KCB.

While a slow economy has hit banks, which traditionally lend to households, those, which deal with corporates have not been spared either.

For instance, CFC Stanbic posted a six per cent drop in its pretax profit for the first nine months of the year to Sh980.7 million compared with the same period last year.

"The economic slowdown has increased default levels forcing banks to increase their provisions," said Mike Du Toit, CFC Stanbic MD in a past conversation with this publication.

A largely corporate bank, CFCStanbic focuses it’s lending to specific sectors including energy, agriculture as well as being financial arrangers in the capital market.

While banks have excess liquidity, this cash is yet to be lent out to the private sector.

This is despite attempts by CBK to lower the central bank rate.

Domestic market

"The infrastructure bond issue presents an avenue for banks to channel out these funds," said Kariithi Murimi, a risk consultant.

Figures indicate that the government has since July borrowed Sh31 billion from the domestic market and has 7 months to borrow more than Sh70 billion.