Kenyan banks record meteoric rise in profits

By JAMES ANYANZWA

The Kenyan banking sector is optimistic as major banks announce huge profits and a record dividend payout to shareholders for the financial year ending December 31, in an economy struggling to recover from the shocks of the Covid-19 pandemic. 19.

After a period of reduced net profits, massive layoffs and frozen dividends in 2020, Kenyan lenders have suddenly rebounded amid modest revenue growth and reduced operating expenses.

So far, six leading banks have released their financial performance figures for the 12 months to December 31, averaging more than 80% growth in net profit.

These were Absa Bank Kenya which recorded the largest increase in net profit of 161%, followed by Equity Bank (99%), KCB (74%), Standard Chartered Bank Kenya (66%), Co -operative Bank (53%) and Stanbic Holdings Ltd (39%).

East Africa learned that inside the bright earnings numbers are huge write-backs on loan loss provisions that have been aggressively planned by bank managers looking to take advantage of the Covid-19 shocks to clean up their bad books in 2020.

It is a process of restoring a provision for bad or bad debts previously made against profits and no longer needed after the commencement of loan execution.

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“There are two things at play here. The implementation of the International Financial Reporting Standard (IFRS9) provided that banks should have more forward-looking provisions for doubtful and bad debts, which was to happen from the end of 2019. So when the Covid-19 came in, you realize the banks were having a drop in profitability because they were very aggressive in their procurement,” said an industry insider who did not want to be named. East Africa.

“A lot of banks have taken advantage of the slowdown in economic growth during the Covid-19 period to do what’s called the ‘clean up’ book. So instead of posting very high profits at a time when the he economy is on its knees, they have been more aggressive in provisioning for bad debts and even more aggressive than the requirements of IFRS 9 which might be conservative in such circumstances.

East Africa learned that the recovery of some of the bank loans that had been deemed bad and non-performing prompted lenders to drastically reduce provisions and increase profitability.

“If these provisions did not lead to default, then there were huge reversals. So what you’re seeing is really the result of huge rewrites as a result of aggressive provisioning during the time of Covid-19,” the source said.

East Africa understands that the jump in profitability is also due to the fact that the base year (2020) on which the comparison is made was a period in which lenders had experienced a sharp decline in profitability.

“Remember that the Central Bank has also made some accommodations in terms of loan loss provisioning. It’s really what I can call a post-2020 baseline. So what you see if anyone one reports almost double profit this is largely due to what i would call the base effect where the base effect means the year (2020) you are measuring the growth against there has been a sharp reduction in profitability,” the source said.

“So a lot of that represents what you see. If the loan portfolio does not increase, the only line from which profitability can increase is from repossessions. So those are the two factors that may explain the huge jump in earnings, but the main one is actually the rewrite following aggressive provisioning that happened during the Covid-19 period.

A study by analysts at AfricanFinancials shows that prior to the pandemic period, Kenyan banks had underfunded their bad debt books by an average of $248 million for five years before doubling it to $444 million in 2020 compared to $157 million in 2019.

Analysts through a report titled Sub-Sahara Africa; December 2020 Bank Bad Debt Charge-Offs, Tracking Covid-19 provisionary provisioning, dated March 2021, indicates that East African and Mauritian banks overprovisioned bad and bad debts by $224 million in 2020.

The increase in provisioning by Kenyan lenders during the Covid-19 period has also been compounded by the Central Bank granting flexibility to banks on loan classification and provisioning requirements for loans that were in default. current on March 2, 2020 and whose repayment period has been extended or have been restructured due to the pandemic.

The one-year window in which lenders had extended and restructured loan repayments for clients affected by the pandemic expired on March 2, 2021, and borrowers had three months to regularize their loan repayments.

According to the CBK, loans amounting to Ksh 1.7 trillion ($14.91 billion) were restructured during the period from March 3, 2020 to February 2021, accounting for 57% of the banking sector’s gross loans. In 2019, Kenyan banks started implementing IFRS 9 which requires them to make larger provisions for expected credit losses.

Under IFRS9, which replaced International Accounting Standard (IAS) 39, banks are expected to provision for projected loan losses rather than those already incurred, which reduces their profitability and erodes their capital.

Data from the Central Bank of Kenya shows that last year (2021) Kenyan banks conservatively sat on excess liquidity and reduced lending to key sectors of the economy to reduce default exposure payment and loan loss provisions in order to remain profitable.

According to the central bank’s monthly statistical bulletin, banks only increased their lending by 2.25% ($121.92 million) to Ksh631.1 billion ($5.53 billion) in 2021, compared to 617.2 billion Ksh (5.41 billion dollars) in 2020.

Banks also cut lending to agriculture and real estate by Ksh 11.9 billion ($104.38 million) and Ksh 30.1 billion ($264.03 million) respectively.

The building and construction and private household sectors were also hard hit, with loans cut by Ksh 1.7 billion ($14.91 million) and Ksh 2 billion ($17.54 million). dollars) respectively.

Banks also cut loans to the finance and insurance sector by 800 million Ksh ($7.01 million) and consumer durables by 900 million Ksh ($7.89 million). Total bank lending to government also slightly decreased by 5% ($171.05 million) to Ksh 380.3 billion ($3.33 billion) in 2021 from Ksh 399.8 billion. Ksh ($3.5 billion) in 2020, according to Central Bank data.

The reduction in loans reduces the provision for loan losses in accordance with the requirements of IFRS 9.

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