17 October 2017

Kenya: Banks to Declare Lower Dividends

Kenyan banks are expected to declare reduced dividends to shareholders this year due to an increasing number of bad loans as borrowers struggle with repayment in an underperforming economy.

The situation is likely to worsen next year when banks start allocating more resources to cushion themselves from bad debts under a new set of global accounting rules.

The rules require banks to make higher provisions for bad loans by roping in even the risk-free lending to the government through Treasury bills and bonds.

Analysts at Renaissance Capital said high non-performing loans (NPLs) remain a big threat to Kenya's banking sector, besides the interest rate law that has fixed lending rates at four percentage points above the Central Bank Rate (CBR), wiping out interest income for the lenders.

Analysts at AIB Capital said the prevailing political environment is an impediment to economic productivity since most investors have suspended their plans while some have chosen to trim their workforce to cut costs.

Political environment

"On the back of this we expect loan book quality to deteriorate further," AIB Capital said in its banking sector report for October.

"With low economic activities, aggregate consumption reduces, corporates scale down on operations and consequently private sector and public sector incomes reduce. This will have the effect of deteriorating the quality of the existing debt stock."

According to Renaissance Capital, Kenya's big banks are likely to weather the political and economic storms and provide some fairly good returns to the shareholders compared with the smaller and mid-sized banks that have lost huge deposits to big banks through flight to safety.

These big banks include KCB, Equity, Co-operative Bank, Barclays Bank, Standard Chartered Bank, Diamond Trust Bank and Commercial Bank of Africa, according central bank's latest ranking in terms of market share.

Equity Bank has suffered the highest deterioration in its NPL book since the rate cap law was implemented in September last year.

This is due to the bank's unsecured portion of its Small and Medium-sized Enterprises lending, exposure to trade customers and delayed payments for suppliers by the government.

Its loan book has contracted with most of the funds being channelled to government securities.

"What concerns us most about Equity is the trend in NPLs. While the deterioration in the NPL ratio to 7.3 per cent in the first half of this year from 6.8 per cent in 2016 and 4.6 per cent in the first half of 2016 can partly be explained by the lack of loan growth; NPLs in absolute terms were up by 1.6 per cent in the 12 months to the first half of 2017," Renaissance Capital Market report dated September 28 notes.

KCB's NPL stands at nine per cent though the lender continues to struggle with stock of bad loans, compared to its tier 1 peers.

The lender announced a Ksh900 million ($9 million) cost restructuring this year and with only 14 per cent of transactions currently taking place in branches.

Analyst at Renaissance Capital expect the bank to further cut its workforce.

Co-operative Bank which has the lowest NPL among listed banks recorded the highest loan growth of seven per cent in the first half of this year as a result of existing customers taking on additional credit lines, and growth in the personal loan segment of the loan book.


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