Banks choke under the weight of unpaid loans

Inability of Kenyans to service loans in the first quarter due to effects of Covid-19 forces lenders to make huge provisionings, eating into their profits.

Rendered jobless by Covid-19, millions of Kenyans failed or struggled to service their loans in the first three months of this year, forcing banks to put aside billions as insurance against possible defaults.   

It is a situation that now threatens to push banks in the red at a time when they are expected to play a key role in stimulating an economy that has been ravaged by the novel coronavirus.

KCB Bank, the country’s largest bank by asset size, put aside Sh2.9 billion to guard against possible loan defaults in the first quarter of this year, according to its financial results published on Wednesday.

This was more than double the Sh1.1 billion loan-loss provision in the same period last year.  

Another tier one lender, Co-operative Bank, also saw its net profits stagnate at Sh3.6 billion during this quarter as provision for loan loss pushed up its operating expenses.

Co-op Bank’s loan provision shot up to Sh900 million, an increase of 80 per cent from Sh501 million that the lender set aside in the same period last year.

The lender said it had restructured loans valued at Sh15.3 billion during this period, some of which might have been provisioned for as they were flagged, or put under watch, way before March 2 when Central Bank of Kenya (CBK) allowed for flexibility. Other banks are yet to release their results but the emerging trend is likely to be across the board.

According to CBK, loans of about Sh87 billion had been restructured, with sectors that have been hard-hit by the pandemic such as hospitality, transport and real estate among the major beneficiaries. 

NCBA, an amalgamation of formerly CBA and NIC, also hinted at the distress of mobile loan payments. NCBA runs M-Shwari, a mobile lending platform, which it co-owns with telecommunications provider Safaricom.

“The group notes the increase in levels of non-performing loans, especially in the transport and manufacturing sectors and on the mobile loan portfolio and has taken proactive steps to increase provisions coverage through an increase in its impairment provisions,” said NCBA in a statement.

Habil Olaka, the chief executive of Kenya Bankers Association (KBA), a bank lobby, said the flexibility in loan loss provisioning offered by CBK, applied to loans that experienced problems after March 2.

“In other words, the loans experiencing problems in the first quarter are not essentially Covid-related,” said Olaka.

However, analysts insist that the current loan provisioning is Covid-19-related, at least as part of the prevailing financial accounting standard, IFRS9, which is forward-looking.

Repayment holidays

IFRS9 replaced IAS39, which allowed for provisioning after a loan had gone for more than three months without being serviced. As such, way before Kenya reported its first case of Covid-19, banks had already flagged accounts that were likely to be affected by travel restrictions as China and Europe implemented lockdown measures.

“The current accounting standard, IFRS9, management is supposed to have a forward-look to the probability of default,” said Martin Kirimi, a senior researcher at Standard Investment Bank.  

Provisioning, said Kirimi, will also happen when clients are given repayment holidays as their stress moves a notch higher as a result of the restructuring.

IFRS9 has four levels. These are “normal and watch”, “substandard”, “doubtful debts” and “loss.”

“We do expect that these loan-loss provisions will explode starting from the second quarter because that is when the current macros really toughened up,” explained Kirimi.

“We foresee maybe a relaxation on the regulations when it comes to classification, that is how long before a loan is considered non-performing,” said David Gitau, an investment analyst at Cytonn Investments.

“This would also help conserve the banks’ capital to avoid a crisis if Covid-19 extends,” added Gitau.  

Although the economic effects of the pandemic are yet to begin manifesting on banks’ balance sheets, analysts believe with a lot of borrowers being left without a source of income, most of them will struggle to service their loans.

A survey by the Kenya National Bureau of Statistics shows that by April, the number of people outside the labour force increased by four million. By December, there were seven million who were either actively looking for work or were completely inactive. They have since increased to 11 million.

Nine in 10 of those who said there were without work said they were not sure when they could go back to work. A third of the respondents struggled to pay rent in the month of April. Such an environment, experts noted, is going to be difficult for banks.

The ratio of gross non-performing loans (NPLs) to gross loans stood at 12.5 per cent in March compared to 12.7 per cent in February, mainly because gross loans grew faster than bad loans, according to CBK. The regulator said it would provide flexibility to banks with regard to requirements for loan classification and provisioning that were performing on March 2, 2020 and whose repayment period was extended or were restructured due to the pandemic.