Winston Churchill made a famous observation during the bleakest days of World War II: Never let a good crisis go to waste.
For Kenyan banks, this rings true. It has become a sector that acknowledges a crisis, marks it as good and quickly finds ways to pick itself up.
At the peak of the Covid-19 pandemic, all sectors of the economy were battered, leading to job cuts in response to flagging earnings.
But the banking sector, which saw its profits dip to an eight-year low in 2020, is already back and surpassed pre-pandemic levels - even as other industries take baby steps on their recovery journey.
Banks’ pretax profits for the full year ended December 2021 grew by 72.7 per cent to a record Sh194.8 billion, taking the earnings past the pre-pandemic levels.
Lenders have in a space of six years faced three major disruptions—change of accounting standard, interest rate cap and now the pandemic-but have come out sparkling like gold from fire.
Kenya Bankers Association (KBA) Chief Executive Habil Olaka says the strength of the sector lies in putting aside competition and working as a team when such crises come.
“What stands out is being able to identify the problem and then having a common strategy on how to resolve it,” he says.
“When you have a common danger, issues of rivalry do not come into play. You first of all jointly avert the danger before you can come back to the arena to compete.”
The unity came out during the pandemic with Central Bank of Kenya (CBK) rallying banks into uniform measures, including waiving transaction fees and extending tenure of loans.
Between March 2020 and February last year, banks restructured loans amounting to Sh1.7 trillion, or 57 per cent of the banking sector’s loan book, amid increased defaults.
They had to sharply increase provisioning for loan defaults in line with the international financial reporting standard (IFRS 9) that was adopted in January 2018.
When the pandemic struck, Olaka says, the sector was in the middle of other issues such as IFRS 9, which would have made them sink.
IFRS 9 is forward-looking and recognises losses well before they actually occur—a difference from the International Accounting Standard (IAS) 39 that was historical.
“When Covid-19 struck, the gloomy picture that was being painted about these accounts going forward led us into very aggressive loan provisioning,” says Olaka.
The sharp rise in provisions saw the sector’s pre-tax profits for 2020 fall by 29.5 per cent to Sh112.8 billion—the lowest in eight years.
In the process, many of the lenders reduced or froze dividend payouts and used the pandemic to build their capital and liquidity positions.
Major lenders such as Equity, KCB and Cooperative Bank of Kenya were also able to tap into long-term loans to build muscles for lending to small and medium-sized enterprises.
Global funds such as the International Finance Corporation, European Investment Bank and Agence Française de Développement (AFD) have lent money to local banks for this course.
Banks are, therefore, emerging from the pandemic with more money to lend to businesses seeking recovery.
Olaka says that banks’ performance now looks like there was “some magic that we don’t seem to understand” but it took good planning to get there.
“Many banks stood with and supported their customers even when the future suggested they were going down the drain. Now that things are looking up, banks are reaping the benefits,” he says.
CBK’s credit survey for December 2021 showed 77 per cent of banks saw improved liquidity in the last quarter of the year, with the majority planning to lend to private sector and government.
Lenders such as Equity, KCB, I&M even acquired banks in DRC Congo, Rwanda and Uganda respectively bucking the trend where many businesses were choosing to postpone expansions and instead preserve cash.
Other lenders including Cooperative Bank and NCBA are even planning to expand their branch networks, showing the bullish mood in the sector.
Co-operative Bank is set to open seven new branches this year, taking its total branches to 200. NCBA targets 12.
Such developments have carved out banks as a sector that thrives even in the face of the pandemic—a black swan moment that has caused unprecedented challenges across sectors.
Global rating agency Moody’s recently said it believes the worst of Covid-19-linked loan defaults is over for Kenya’s banking sector and expects improved repayments this year.
Moody’s, which rated the sector as stable, expects the portion of defaulted loans will go down in the next 12 to 18 months while profitability rises in line with recovering pace of economic activities.
It said restructured loans for the sector amounted to 16 per cent of the loan book by August last year but loans in arrears were just one per cent, suggesting that “residual credit risk is contained”.
As to whether the ability to use every crisis as a springboard means the banking sector has assembled the best talent compared to other sectors, Olaka says bankers are not about to blow their own trumpets.
“It is up to the public to judge how we respond by deploying our talent to respond to issues. Every sector has its own talent but the effectiveness is dependent on how organised the industry is,” he says.
Bankers also did not waste the business disruption that followed after August 2016 when President Uhuru Kenyatta signed into law the Banking (Amendment) Bill that took away their freedom in pricing loans.
A day after the signing, Olaka said at a packed press conference in Nairobi that while KBA members had reservations about the law, “we will comply with it”.
“What we are going to see is banks becoming innovative in providing other services that are not currently being offered,” he said.
The lenders responded by revising their business models and tightening their loan approvals to shield themselves from high defaults.
The sector had to lean more to Treasury bills and bonds while also moderately growing loans to the private sector to navigate the period that lasted up to November 2019.
In 2017—the first full year under capped interest rates—banks recorded a 9.8 per cent drop in pre-tax profit to Sh135.5 billion.
However, the sector’s performance rebounded the following year, hitting Sh152.3 billion to overtake the earnings before the rate cap, before the law was finally repealed in November 2019.
“To rise above crises such as rate cap and Covi-19 disruptions, the formula has been the same: identifying the problem, jointly agreeing on a solution and the implementation road map,” says Olaka.