East Africa's commercial banks endured a difficult time during the six months' period to June 30 this year, recording lower than expected growth in earnings amid mounting pressure on interest income--their key source of revenues--while struggling to raise long term funding to boost their lending business.
A cocktail of factors including a requirement to increase loan loss provisions conspired to deny banks hefty earnings which they enjoyed even during difficult periods of economic downturn.
Unaudited financial statements sampled by The EastAfrican show that most lenders have crawled into single-digit profit growth while others have turned into losses.
While the performance may not be encouraging to the managers of these institutions, analysts think the earnings prospects of the second half of the year appear even dimmer going by the rising volume of non-performing loans, flashing signals of weaker than expected economic growth of regional economies and difficulties in mobilising long term deposits to sustain lending businesses.
A survey by global consultancy firm McKinsey & Company titled Roaring to life: Growth and innovation in African retail banking released last year underscored the significance of customer deposits arguing that deposits by retail customers will be the greatest source of revenue generation for African banks contributing an estimated $11 billion to the banks' top line during 2017-2022 period.
However, analysts at AIB Capital say profit margins in East Africa's banking industry will be hurt as lenders increase provisions in compliance with the new International Financial Reporting Standard (IFRS 9) which demands higher provisioning for bad loans.
In Kenya, Central Bank had exempted banks from charging increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), a that saw banks record lower expenses while pushing up profits.
The banking regulator allowed banks to charge their increased loan-loss provisions against the retained earnings in the balance sheet and not in the profit-and-loss account, sparing them a drastic dip in profits.
However, from January banks started making full provisions in compliance with the new accounting standards in a move that is now having negative impact their earnings.
In Tanzania, Mkombozi Commercial Bank narrowed its net losses during the six months' period to June 30 this year to Tsh902 million from Tsh1.89 billion with deposits growing by one per cent to Tsh141.32 billion from Tsh140.37 billion.
Return on equity
Tanzania's NMB Bank Plc recorded a four per cent growth in net profit to Tsh36.52 billion from Tsh34.96 billion ($391,509), with return on total average assets declining to 2.3 per cent from 2.5 per cent.
Interest income increased three per cent to Tsh154.04 billion ($66.86 million) from Tsh 148.83 billion ($64.6 million).
In Rwanda, the Bank of Kigali's net profit increased by 8 per cent to Rwf 14.55 billion ($15.67 million) from Rwf 13.41 billion ($14.44 million) while customer deposits grew by 4 per cent to Rwf 551.69 billion ($594.24 million) from Rwf 531.95 billion ($572.98 million), according to the lender's unaudited statements.
Its interest income, however, increased by 25 per cent to Rwf 56.25 billion ($60.58 million) from Rwf 44.75 billion ($48.2 million) while non-funded income declined 6 per cent to Rwf 13.14 billion ($14.15 million) from Rwf 14.02 billion ($15.1 million).
According to the National Bank of Rwanda the industry's return on equity declined to 9.3 per cent from 9.5 per cent while return on assets remained flat at 1.6 per cent, during the period under review.
In Kenya, the three largest retail banks--KCB, Equity and Co-operative--made a combined average growth in net earnings of 6 per cent weighed down by slower growth in customer deposits, lower interest income on loans and advances, increased loan loss provisions and higher NPLs.
KCB with operations in Uganda, Rwanda, Tanzania, Burundi and South Sudan saw its net profit during the period increase by 5 per cent to Ksh12.72 billion ($127.2 million) from Ksh12.11 billion ($121.1 million) in the same period last year, with its loan loss provision increasing to Ksh3.03 billion ($30.3 million) from Ksh827.68 million ($8.27 million).
Equity has regional operations in Tanzania, Uganda, Rwanda, South Sudan, Democratic Republic of Congo and a commercial representative office in Ethiopia.
Diamond Trust Bank, which has regional subsidiaries in Tanzania, Uganda and Burundi saw its net profit rise by 11 per cent to Ksh3.88 billion ($38.8 million) from Ksh3.49 billion ($34.9 million), with customer deposits increasing by 0.5 per cent to Ksh283.06 billion ($2.83 billion) from Ksh281.74 billion ($2.81 billion).
Its interest on loans declined by 10 per cent to Ksh9.9 billion ($99 million) from Ksh11.05 billion ($110.5 million) while total interest income declined to Ksh16.34 billion ($163.4 million) from Ksh17.5 billion ($175 million).
Last year, the volume of deposits for Kenya's listed banks grew at slower rate of 10.3 per cent compared to 12.5 per cent in 2017 according to analysts at Cytonn investments Ltd.
Listed banks that posted single digit growth in deposits last year were Co-op Bank (6.2 per cent), KCB (7.6 per cent), Diamond Trust Bank (6.2 per cent), Standard chartered Bank Kenya (5.1 per cent) and HF group whose volume of deposits fell by 5.3 per cent, according to data compiled by Cytonn Investments.
In Tanzania demand deposits decreased to Tsh3.63 trillion ($1.57 billion) in March 2018 from Tsh4.44 trillion ($1.92 billion) in March 2017 while savings deposits fell to Tsh1.81 trillion ($785 million) from Tsh2.98 trillion ($1.29 billion) in the same period.
Term deposits dropped to Tsh2.69 trillion ($1.16 billion) from Tsh3.27 trillion ($1.41bn).