Loan defaults derail bank earnings

Growing borrowers risk profiles and loan defaults have thrown bank earnings off the trail as lenders continue to provision billions towards expected credit losses.

The higher provisions have left bank earnings through the first six months of the year trending downwards.

An analysis of commercial banks who have since disclosed their half year earnings show a sequence of high bad-loans provisions along with growing non-performing loans (NPLs).

The growth in NPLs being against the widespread restructure of customer loans by banks for a minimum 12 months along with guidelines by the Central Bank of Kenya (CBK).

Loan defaults along with anxiety on future credit losses have seen banks opt to set aside billions as cover for potential credit losses.

“We continue to see weaknesses in our customers. This has meant we have had to become much more conservative. Our level of provisions for potentially bad loans has increased four fold because of what we anticipate,” said KCB Group CEO Joshua Oigara.

The level of provisions has however differed as some banks opt to postpone funding into the credit-loss buffer.

The IFRS-9 standard implemented from January 1, 2018 changed how banks recognize and provide for credit losses in financial reporting by changing terms on disclosure from an incurred loss to an Expected Credit Loss (ECL) framework.

The implementation of the standard has however been open to interpretation by banks as some hold-off against doubling up on the provisions.

“Some banks have opted to take the bullet now while others have postponed provisioning into the future. The difference in the levels of provisioning we’re seeing is due to subjectivity in interpreting the current environment,” said Gerald Muriuki, a Senior Equities Researcher at Genghis Capital.

While some lenders chose to laugh now and cry later, Stanbic Bank says it has decided to take the initial pain.

“This environment is probably one in a hundred years. It’s been important to take a long-term view of our customers. We have therefore become prudent to put in place the required levels of provisions,” Stanbic Bank Kenya Chief Financial Officer Abraham Ongenge said.

The outlook on banks’ asset quality is set to remain volatile going into 2021 as the term of bank-loan restructures lapses in March.

According to disclosures by the CBK, commercial banks had restructured a combined Ksh.844.4 billion worth of credit lines to borrowers by the end of June including Ksh.240 billion in loans to households.

The curve of provisions and NPLs is expected to tinker with private sector credit growth as banks become more risk-averse.

Already, private sector credit growth has taken a downward turn declining to 7.6 per cent in June from 8.4 per cent in May.

CBK Governor Patrick Njoroge has however eased concerns on sector NPLs which stood at 13.1 percent in June as he expects a rebounding in activity to dilute borrowers’ risks.

“The issue of NPLs is not mechanical. These are highly exceptional times and it’s not the individual borrower credit risk that has changed. If everything was as it were before, the credit rating would not have been altered,” he told a May 28 news conference.

“Banks shouldn’t have been penalizing themselves for the risk and neither should they penalize borrowers.”

Provisioning trends

KCB Group

The country’s largest lender by asset base reported a 40 per cent decline in half year earnings on Wednesday to Ksh.7.6 billion.

Its level of loan-loss provisions increased by 367 per cent from Ksh.3 billion to 11 billion.

Gross NPLs in the period rose by 215 per cent to Ksh.83.9 billion from Ksh.39.1 billion.

KCB reported the restructure of Ksh.101 billion, the highest in the industry so far.

Co-op Bank

The Co-operative Bank of Kenya booked a Ksh.7.2 billion half-year profit which was 4 percentage points lower than in 2019.

Its level of provisioning rose by 57 per cent to Ksh.1.9 billion from Ksh.1.2 billion while Gross NPLs increased by 12 per cent to Ksh.34.3 billion.

Co-op restructured loans worth Ksh.39.2 billion in the period.

Stanbic

The lender reported a 37 per cent slump in earnings to Ksh.2.6 billion after raising its level of provisions by 85 per cent to Ksh.1.7 billion from Ksh.917 million.

Its share of NPLs meanwhile picked up 18 per cent to Ksh.21.2 billion while it restructured Ksh.38 billion of its loan book.