Kenyan banks are figuring out how to recover as they face lower end-of-year bonuses and reduced dividends for shareholders.
The banks are weighed down by the Covid-19 pandemic, the spillover effects of rate caps, stringent loan loss provisioning, demands of the international financial reporting standard (IFRS 9), and challenging economic conditions that have seen the government downgrade the growth prospects of this year to a record low of 0.6 percent, from 2.6 percent.
Considering the quarterly performance of the banks, the prospects for full recovery this year remain weak. Top banks that have released their financial performance figures for the nine months to September 30, such as KCB, Equity, Co-operative Bank, Absa and Standard Chartered, have posted double digit declines in net earnings. Market analysts and economists say the pandemic exacerbated the high level of non-performing loans (NPLs).
Global rating agency Fitch noted that Kenyan banks entered 2020 with weak asset quality, as evidenced by the high NPL ratio of 12 per cent on December 31, 2019, and by August this year the ratio was up to 13.6 percent. In a special report dated October 8, 2020, Fitch said the policy rate cuts, reduced economic activity, rising loan impairment charges, debt relief measures and subdued loan growth will reduce bank profits this year.
"The industry was already facing elevated NPLs pre-Covid. Covid-19 has increased the NPL risk due to borrowers facing reduced business activity," said Francis Mwangi, CEO of Kestrel Capital Ltd.
The level of NPLs stood at 9.4 percent in 2016 and crossed the double-digit mark in 2017 at 12.3 per cent, before increasing marginally to 12.7 per cent and 12.6 percent in 2018 and 2019, respectively. Currently, NPLs are approximately 13 percent, up from the 4.4 percent to eight per cent range during 2009 to 2013. KCB Group recorded a 43 percent drop in net profit during the nine month period ended September 30, with the lender more than tripling its loan loss provisions to Ksh20 billion ($182 million) from a low of Ksh5.84 billion ($53.2 million). The lender, which has operations in Kenya, Uganda, Tanzania, Rwanda, Burundi and South Sudan recorded a net profit of Ksh10.89 billion ($99.1 million), down from Ksh19.16 billion ($174.4 million) in the same period last year.
Co-operative Bank's net profit declined by 10 per cent to Ksh9.8 billion ($89 million) from Ksh10.9 billion ($99 million) on account of reduced banking transactions and increased provisioning.
The lender's profit after tax declined to Ksh9.8 billion ($98 million) from Ksh10.9 billion ($109 million) in the same period last year.
Equity Group recorded a 14 per cent decline in net profit for the nine months to September 30 largely as a result of rising operational costs and increased provisioning for bad loans. Its net profit declined to Ksh15 billion ($150 million) from Ksh17.5 billion ($159 million) in the same period last year, with the Tanzanian subsidiary yielding to a net loss of Ksh200 million ($1.82 million) while the Congolese subsidiary's net profit dropped by 34 per cent to Ksh600 million ($5.46 million).
Fitch forecast Kenya's GDP growth to slow down to one per cent this year, the lowest since 2008.
"I think generally, Covid has possibly exacerbated what was already a simmering problem in the banking industry," Kenya Bankers Association chief executive Habil Olaka told The EastAfrican in an earlier interview.
"You recall the interest capping law was repealed last year in November, and it was already uncovering what was a simmering problem," Mr Olaka said.
The banking sector started extending credit to small and medium-sized enterprises. Just when credit expansion was beginning to pick up at the beginning of this year, Covid-19 happened, he added.