Top banks build Sh230b war chest for bad loans amid economic gloom

Kenya’s largest banks have allocated a total of Sh235 billion for loan losses due to concerns about a slowdown in the country’s economy and an increase in defaults among businesses and individual borrowers over the past nine months. 

An analysis of the financial statements of the top commercial banks, which have so far released their results for the nine months ending September 30 this year, shows that most of the tier-one lenders have increased their credit loss reserves by billions of shillings in response to the uncertain economic and credit market conditions. 

This accumulation of rainy-day funds by banks comes as a majority of commercial banks anticipate that more borrowers and traders will default on their household and business loans.

The projected rise in loan defaults by borrowers is on the back of the worsening economic conditions in the country, with the largest banks fearing this would add stress to their overall asset quality. 

As of August this year, the share of loan defaults had risen to Sh674.9 billion from Sh641.3 billion in March, according to data by the Central Bank of Kenya (CBK), indicating a cash crunch in the economy. 

This has led to property seizures for thousands of borrowers. The increasing defaults are a reflection of the challenges faced by Kenyans in an economy that has seen numerous job losses across various sectors. 

Listed firms are continuing to issue profit warnings signalling the worsening economic conditions that have constrained demand. 

Yesterday, marketing firm WPP Scangroup joined tea producer Sasini to issue an earnings caution.  

“The Board of Directors of WPP Scangroup Plc wishes to inform the shareholders of the company, potential investors and the general public that based on the preliminary assessment of its projected consolidated financial results for the financial year ending 31 December 2024, net consolidated earnings for the Company and its subsidiaries will be at least 25 per cent lower than that reported in the financial year ended 31 December 2023,” said the firm. 

Sasini said separately that based on “our forecast of the financial results and taking into consideration the information currently at the Board’s disposal, we anticipate that our projected net earnings for the year to 30th September 2024 will be 25 per cent lower than the reported earnings for the year ended 30th September 2023. 

“The business performance for the period has been adversely affected by several extenuating circumstances in the global macro environment; the global economic situation and continuing geopolitical disruptions in our business value chain being the key factors.” 

Amid such projections by corporates and enterprises, commercial banks in turn reckon, that the need for caution and prudence in provision is justified by the turbulent macroeconomic environment, which is currently characterised by high interest rates according to the majority of lenders. 

Equity Group, for instance, reported an increase in provisions, with the amount billion in the first nine months of this year rising to Sh45.9 billion compared to Sh44.9 billion in the previous year. 

Our analysis of tier-one lenders’ financial results for the first nine months of the year shows that they have set aside significant funds to protect against loan losses running to over Sh200 billion.  

Despite the tier-one banks posting massive profits largely driven by regional subsidiaries the banks have rebuilt their rainy-day funds, further impacting potential profits, underlining their cautious optimism.  

Equity Group, for instance, reported an increase in provisions, with the amount billion in the first nine months of this year rising to Sh45.9 billion compared to Sh44.9 billion in the previous year. 

This growth in provisioning coincided with an increase in the lender’s gross non-performing loans, which stood at Sh125.3 billion as of September 30, 2024.  

Equity Group Chief Executive James Mwangi emphasised that as the lender continues to provide loans during uncertain times, it must also be prepared to enhance its loan loss provisions. 

“The global operating environment characterised by macro-economic shocks saw the Group continuing with its conservative and prudent defensive approach by booking adequate loan loss provisions. This has resulted in an NPL (non-performing loan) coverage ratio of 67 per cent with an NPL ratio of 13.4 per cent, way below the latest published industry average of 16.7 per cent,” said Mr Mwangi. 

“The Group continues to make significant strides in its differentiated managerial strategy and in enhancing its control environment to better position it to navigate the challenging macroeconomic and complex regulatory landscape while driving sustainable growth.”

KCB Group’s provisions rose 12 per cent to Sh 109.9 billion, an increase of Sh13.3 billion. 

The rise was primarily driven by a 15 per cent rise in dud loans, which reached a total of Sh215.3 billion. 

“The Group’s stock of NPLs stood at Sh215.3 billion, which saw the NPL ratio close the quarter at 18.5 per cent reflecting the economic conditions in different sectors across the markets,” said KCB. 

“To mitigate the effect of increased NPLs, provisions increased year on year by 12.2 per cent. The Group continues to prioritise efforts to improve asset quality with various measures in place to reduce the NPL ratio both in the short and long-term.” 

CBK data indicates that lending to the private sector has sharply decelerated, with growth plummeting to 1.3 per cent t in August from 3.7 per cent in July. 

In the nine-month period, I&M Group reported a growth of provisions to Sh17.1 billion, while bad loans decreased to Sh35 billion from Sh36 billion the previous year.  

Co-operative Bank of Kenya (Co-op Bank), on the other hand, saw its provisions go up to Sh37.2 billion from Sh32.8 billion. This came as its dud loans rose to Sh70 billion from Sh61 billion in the nine-month period. 

Absa Bank Kenya also experienced a similar trend, with provisions growing to Sh20.7 billion from Sh17.8 billion. This came bad loans rose to Sh42.6 billion from Sh34.5 billion. 

Central Bank of Kenya (CBK) Governor Kamau Thugge earlier cautioned banks to prepare for a surge in defaults by increasing their provisions, as non-performing loans continue to be a major concern in the banking sector.  

Other lenders, however, remain bullish and have not raised their provisions but instead lowered them as they believe their loans are performing. 

Standard Chartered Bank Kenya, lowered its provisions, reaching Sh5.9 billion, while its bad loans decreased to Sh12.1 billion from Sh23.5 billion.  

Banks have been facing ever-rising loan defaults, after the onset of Covid-19 in March 2020, which affected millions of households as their incomes dropped and businesses ground to a halt.

Banks with high levels of non-performing loans are also unable to lend to households and companies. This is harmful to the economy as a whole. When granting loans to their clients, banks always expose themselves to credit risk – the risk that the borrower may not pay back the loan. When this happens, the loan is said to become non-performing.

A loan becomes non-performing when the bank considers that the borrower is unlikely to repay or when the borrower is 90 days late on payments. 

Kenya’s economic outlook has darkened significantly, with CBK revising its growth projections for 2024 down to 5.1 per cent from 5.4 per cent. 

CBK Governor Kamau Thugge announced the new forecast recently during a press briefing, highlighting a troubling deceleration across key sectors, including construction, mining, and quarrying. 

The downward revision reflects the economy’s sluggish performance in the second quarter of the year, primarily due to contractions in key sectors like construction and mining. 

CBK data indicates that lending to the private sector has sharply decelerated, with growth plummeting to 1.3 per cent t in August from 3.7 per cent in July. 

This decline is primarily attributed to a rise in non-performing loans, now at 16.7 per cent of total loans, further tightening the fiscal stranglehold on consumers and businesses alike.