Kenyan banks face lower earnings as bad loans rise

Kenyan banks are facing increased pressure to deliver decent returns to shareholders as their key revenue sources record modest growth.

Data shows a sector still struggling with the implementation of new accounting standards that have impacted profitability and capital positions.

A new report on the state of banking by the industry lobby Kenya Bankers Association, (KBA) paints a not-so-rosy picture of the outlook this year, especially with the increase in loan-loss provisioning weighing heavily on total net earnings.

But it is not all gloom.


Last year, the sector’s total income grew by a modest 3.3 per cent, a turnaround from a 4.8 per cent decline in 2017, largely buoyed by increased interest income on government securities, with the top banks investing heavily in Treasury bills and bonds.

But the banks’ modest growth in income last year is not sufficient to cushion the sector from shocks from increased provisioning for bad loans this year.

The report notes that while the 3.3 per cent growth is a positive development, it is well below the double-digit levels seen during the 2014-2016 period.

“From 2019, the full loss provisions will be charged as a cost on banks’ comprehensive income. There is an obvious focus on the level of non-performing loans in the market,” the report notes.

It notes that bad loans have been on the rise, especially over the past three years, breaching the single digit level in two of the three years.

The total NPLs as a proportion of gross loans stood at 12.3 per cent and 12 per cent in 2017 and 2018 respectively, up from 9.4 in 2016.

The growth in banks’ principal revenue sources — interest income on loans and advances and fees and commissions levied on banking transactions — have slowed while investment in government securities is becoming uncertain due to the declining yields on Treasury bills and bonds.

In 2018, the banks’ total fees and commission income, which have been in decline, grew by just two per cent.

The sector’s declining interest income is as a result of a slowdown in the growth of loans —  1.9 per cent in 2018, from 4.03 per cent in 2017.


So far, earnings for the 12 lenders listed on the Nairobi Securities Exchange slowed down in the first three months of this year, growing by 12.2 per cent compared with 14.4 per cent in the same period last year. Analysts blame this on falling interest income on loans and government securities.

Last year, the banks’ earnings from government securities, whose share of total income had fallen from about 20 per cent in 2003 to about 11 per cent in 2011, reversed the trend with share rising to about 23 per cent.

But from January to March, the banks’ heavy investment in government securities turned sour when yields started declining, causing some lenders to review their investments in government papers.

The Kenyan banks had invested over Ksh2.5 trillion ($25 billion) in government securities by March 31, this year, translating into lower earnings when yields dropped.

Yields on the 91-day Treasury bill fell to 7.09 per cent during the three months to March 31, 2019, from 8.03 per cent in the same period last year, while yields on the 182-day Treasury bills fell to 8.58 per cent from 10.48 per cent, according to Central Bank data.

Yields on the 364-day Treasury bills also declined to 9.52 per cent from 10.81 per cent.

The banks’ investment in Treasury bills and bonds grew at a slower rate of 16 per cent, compared with 25 per cent in the same period last year, signalling a gradual shift from government securities.

The report also notes that the quality of the loans issued by banks have continued to deteriorate as borrowers default on their loan repayment obligations due to the poor performance of the economy and the delayed payment by the government to its suppliers.


The industry recorded growth in loan loss provisions of 11.7 per cent last year but several banks absorbed the cost by charging it against the balance sheet and not the profit and loss account.

In the first three months (January-March) of this year, the industry’s volume of bad loans increased 17 per cent to Ksh977.3 billion ($9.77 billion) from Ksh837.1 billion ($8.37 billion) in the same period last year, according to CBK

The Central Bank of Kenya had given the lenders a one-year earnings “protection” window for the implementation of the new accounting standards, the International Financial Reporting Standard (IFRS 9) to charge the higher loan provisions against the retained earnings in the balance sheet and not the profit and loss account.

IFRS 9 demands higher provisioning for loans and all debts owed to banks by customers as a result of the supply of goods and services, with this cost chargeable against the profit and loss account.

However, CBK excused Kenyan lenders from charging the increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), a move that saw banks record lower expenses while pushing up profits.

Under the IFRS9, which replaced the International Accounting Standard 39, banks are expected to provide for projected loan losses rather than those already incurred, thereby reducing their profitability and eroding their capital base.

According to KBA, the new requirement will negatively impact the bank’s profit this year, further worsening their financial positions that have been heavily hit by the declines in interest income and fees and commissions.

By The Eastafrican

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