Why the CBK isnt losing any sleep over banks sinking profitability

Banks earnings continue to take a beating from economic disruptions occasioned by the COVID-19 pandemic. This however is merely a secondary concern for the Central Bank of Kenya (CBK).

The reserve bank’s monetary policy committee (MPC) meets on Thursday next week to discuss among other subjects, the lender’s support for the post-pandemic recovery and the review of the benchmark lending rate.

Meanwhile, banks continue to report depressed earnings. However, the CBK will lose no sleep over the evolution of sector earnings as the industry remains consistently stable by virtue of strong capital and liquidity reserves.

Unlike banks chief executive officers (CEOs) who are occasionally judged on their ability to churn out a return for shareholders, the CBK is judged on the sector’s core stability.

“As long as capital and liquidity thresholds are stable, then the poor performance of banks does not concern the CBK.” Sterling Capital Head of Research Renaldo D’Souza said.

In spite of falling earnings occasioned largely by higher costs of covering potential loan defaults, banks sound capital and liquidity positions have barely been rattled.

“The banking sector remains stable and resilient with strong liquidity and capital adequacy rations,” the CBK noted in its post MPC meeting statement in September.

Liquidity refers to the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value. This is calculated by divided current assets (those reasonably convertible into cash in under a year) with short term obligations (current liabilities).

Meanwhile, capital refers to the integral component of growing a business and incorporates debt, equity and working capital.

The two metrics have continued to strengthen amidst uncertainities as per an analysis by Citizen Digital on banks trading results to September 30.

None of the major banks that have reported earnings in the period have dropped the hammer in progressing the key buffers.

Standard Chartered Bank which recorded a 30.6 per cent dip in profit has for instance grown its capital by 10.3 per cent between April and September to Ksh.40.6 billion, the highest among tier one banks.

Similarly KCB, Equity, Co-operative Bank and Absa which have also recorded significant dip in earnings have also grown their capital bases by 5.7, 2.3, 5.5 and 2.8 per cent respectively over the same period.

Banking sector liquidity has also largely held up with the five banks fluidness ratio averaging 49.2 per cent against a CBK threshold of 20 per cent.

CBK Governor has credited the bank’s rapid response to cushion the industry at the onset of the pandemic.

“Like in any other crisis, liquidity becomes a real problem and so we put measures quickly that would increase liquidity in the system and in banks. To date, that has not been a concern at all,” he told the Central Bank of the Future Conference held virtually on Wednesday night.

The CBK has remained proactive to cushion both banks and their clients against the worst from the pandemic.

The reserve bank for instance lowered the cash reserve ratio from 5.25 per cent to 4.25 per cent in March freeing up Ksh.35.2 billion in new funding to banks.

Further, the CBK allowed commercial banks to restructure loans to customer by up to one year easing the pressure on the industry’s asset quality along with the retention of a low benchmark lending rate which presently stands at seven per cent.

Moreover, banks were asked to resubmit their internal capital adequacy assessments and deploy additional interventions such as working in teams to facilitate business continuity.

The interventions have been anchored primarily on the maintenance of public trust and confidence in the banking sector.

“The duration and extent of the pandemic remains uncertain and it is critical that this institutions remain resilient by strengthening their balance sheets through increased provisioning for non-performing loans (NPLs), Further, resilient banks will be in a good position to support the post-pandemic economic recovery,” CBK Director of Banking Supervision Gerald Nyaoma told banking sector CEOs in a memo published in March.