Banks build Sh60 billion war chest for bad loans amid economic uncertainty

Kenya's largest banks have allocated a total of Sh60 billion for loan losses so far in the past nine months due to concerns about a slowdown in the country's economy and an increase in defaults among businesses and individual borrowers.

An analysis of the financial statements of the top commercial banks, which have released their results for the nine months ending September 30, 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 funds is happening as a majority of commercial banks now anticipate that more than half of Kenyan borrowers and traders will default on their household and business loans, as revealed by a recent survey conducted by the Central Bank of Kenya (CBK).

The projected rise in loan defaults to 54 per cent is on the back of the worsening economic conditions in the country, and the 39 banks fear this would add stress to their overall asset quality.

As of August this year, the share of loan defaults had risen to Sh611.4 billion from Sh496.6 billion in January, according to data by the 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, indicating the downturn that has constrained demand.

The Federation of Kenya Employers (FKE) has expressed serious concerns about the state of the economy.

On Friday last week, it issued a warning, stating that the Kenyan economy is in a critical condition and could potentially result in widespread business closures and subsequent job losses.

"The employers' view is that the changes have had an overall negative impact on cash flows and the financial positions of enterprises in various ways," said FKE Chief Executive Jacqueline Mugo and national president Habil Olaka at a press conference in Nairobi.

"There is a risk of business closure and increased laying off employees."

FKE said business expenses have become unmanageable since the introduction and execution of the Finance Act 2023, which brought in a series of taxes as the Kenya Kwanza government intensifies its revenue-raising strategies.

Paint maker Crown Paints, and marketing and communication group WPP Scangroup became the latest listed firms to issue an earnings caution last week as the cost of doing business soars.

Other listed companies that had earlier cautioned about their earnings include agricultural firm Sasini and automotive dealer Car and General.

And now banks reckon the need for caution and prudence in provision is justified by the turbulent macroeconomic environment, which is currently characterised by sticky inflation, high interest rates, and the depreciation of the shilling against the dollar.

Analysis by Financial Standard 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.

While bank profits reached record highs last year due to resurgent economic growth, profits have since decreased or grown at a slower pace as banks rebuild their rainy day funds, further impacting potential profits.

Equity Group reported a significant increase in provisions, with the amount nearly doubling to Sh18.99 billion in the third quarter compared to Sh9.66 billion the previous year.

This growth in provisions of 96.58 per cent coincided with a more than 50 per cent increase in the lender's gross non-performing loans, which stood at Sh124.4 billion as of September 30, 2023.

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.

KCB Group's provisions rose to Sh15.8 billion, an increase of Sh8.5 billion.

The rise was primarily driven by a 25 per cent rise in dud loans, which reached a total of Sh187 billion.

KCB Group, the largest bank in the region, specifically highlighted the manufacturing and real estate sectors as the main contributors to these bad loans, due to the challenging operating conditions.

"Contribution to the stock of non-performing loans is concentrated within a few sectors as legacy non-performing loans in tourism and transport sectors continue to decline," said KCB during its investor briefing on November 22.

"We continue to take prudent measures on the non-performing loan book aimed at building and maintaining adequate coverage from both provisions and securities held."

In the nine-month period, I&M Group reported a growth of nearly a third in its provisions, reaching Sh4.6 billion, while its bad loans increased to Sh36.1 billion from Sh23.6 billion the previous year.

Absa Bank Kenya also experienced a similar trend, with provisions growing by over a third, amounting to Sh6.7 billion, and bad loans rising to Sh34.5 billion from Sh20 billion.

Standard Chartered Bank Kenya, on the other hand, witnessed a significant increase of 193 per cent in provisions, reaching Sh1.82 billion, while its bad loans stood at Sh23.5 billion.

The governor of the Central Bank of Kenya (CBK), Kamau Thugge, has 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.

"The ratio of gross non-performing loans (NPLs) to gross loans stood at 15.0 per cent in August 2023 compared to 14.2 per cent in August 2022," he said in October following a post-Monetary Policy Committee meeting briefing.

"Increases in NPLs were noted in the manufacturing, mining and quarrying, real estate, and building and construction sectors. Banks have continued to make adequate provisions for the NPLs."

Some lenders, however, remain bullish and have not raised their provisions but instead lowered them as they believe they are adequately covered.

NCBA, for instance, said it lowered its provisions by nearly a third to Sh6 billion in the period from Sh8.3 billion a year earlier.

This came as its bad loans jumped by 18 per cent to Sh43 billion in the period that ended September compared to a year earlier.

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 a payment.

The National Treasury recently warned that CBK's fight to rein in inflation could tip the battered economy into a temporary recession.

The warning came when CBK attempted to squeeze high inflation out of the economy through the toughest round of rate increases in recent years.

Treasury Cabinet Secretary Njuguna Ndung'u said recently that despite its unintended risks of slowing the economy, the fight against inflation is a necessary evil.