Lower credit impairments signal falling loan defaults

Lower credit impairment costs by local commercial banks has signaled an ease to loan defaults by borrowers.

This is as the banking clients resume loan repayments as the economy begins to re-emerge from disruptions of the COVID-19 pandemic.

The low impairments as seen in banks half year results have freed up funds for the industry culminating in the multiplication of bank profitability.

While the drop in loan-loss provision costs may be taken with a pinch of salt as gross non-performing loans (NPLs) expand, Kenya Bankers Association (KBA) CEO Habil Olaka has termed the impairments as leading indicators to the direction on loan defaults.

“IFRS-9 is forward looking. You look at the likely future impact of that asset on its ability to repay. In the middle of a pandemic, you are likely to be pessimistic in terms of projections because things are evolving in a negative way, from an accounting perspective, banks are found to be very conservative and we saw them take significant provisions,” he said.

“It is not a matter of relaxing the rules but about applying the same rules consistently. When we got signs of recovery, the prospects are far much better than a year ago. No wonder provisions are coming down.”

According to analysis of the performance of listed banks in six months to June by Citizen Digital, credit impairments have dropped by 56 per cent to just Ksh.27.1 billion in contrast to Ksh.61.6 billion in June 2020 and an even greater Ksh.133.5 billion in December.

Meanwhile, gross NPLs in the same period have risen by 18.1 per cent to Ksh.347.2 billion from a lower Ksh.294 billion 12 months ago.

When broken down further, the cut in loan-loss provisions has exited the accumulation of loan defaults in banks by about three times.

The significant cut in provisions has found major anchoring in the resumption of payments for loans restructured in 2020.

For instance, 89.3 per cent of loans restructures by the KCB Group are now performing as normal as the banks NPL ratio eases to 14.3 per cent from 14.8 per cent.

The lender has meanwhile covered 70 per cent of its NPLs through the provisions.

Peer Equity has meanwhile seen its NPL ratio retreat to 10.7 per cent from a higher 11.3 per cent and has more than enough cover for the bad loans at 103 per cent.

According the bank, 78 per cent of its restructured book is now performing. The lender had restructured an estimated Ksh.177 billion loans under the Central Bank of Kenya (CBK) guided moratorium.

NCBA Managing Director John Gachora says banks have been fast to provide buffers for potential impairments as represented by the significant provisions taken in 2020.

The loan-loss provisions represented about 103.2 per cent of the banking industry’s profit before tax (PBT) last year according to data from KBA.

“One starts taking provisions as soon as you notice there are problems. NPLs  mean that the problem has since crystallized. What we saw was banks taking very large provisions last year on account of what they termed to be problems. Provisions happen long before the actual rise in NPLs,” Gachora said.

“In terms of expectations, if you see provisions coming down, it means that the expectation is the loan book has improved, and in future, you should see NPLs coming down.”

This is as the banking clients resume loan repayments as the economy begins to re-emerge from disruptions of the COVID-19 pandemic.

The low impairments as seen in banks half year results have freed up funds for the industry culminating in the multiplication of bank profitability.

While the drop in loan-loss provision costs may be taken with a pinch of salt as gross non-performing loans (NPLs) expand, Kenya Bankers Association (KBA) CEO Habil Olaka has termed the impairments as leading indicators to the direction on loan defaults.

“IFRS-9 is forward looking. You look at the likely future impact of that asset on its ability to repay. In the middle of a pandemic, you are likely to be pessimistic in terms of projections because things are evolving in a negative way, from an accounting perspective, banks are found to be very conservative and we saw them take significant provisions,” he said.

“It is not a matter of relaxing the rules but about applying the same rules consistently. When we got signs of recovery, the prospects are far much better than a year ago. No wonder provisions are coming down.”

According to analysis of the performance of listed banks in six months to June by Citizen Digital, credit impairments have dropped by 56 per cent to just Ksh.27.1 billion in contrast to Ksh.61.6 billion in June 2020 and an even greater Ksh.133.5 billion in December.

Meanwhile, gross NPLs in the same period have risen by 18.1 per cent to Ksh.347.2 billion from a lower Ksh.294 billion 12 months ago.

When broken down further, the cut in loan-loss provisions has exited the accumulation of loan defaults in banks by about three times.

The significant cut in provisions has found major anchoring in the resumption of payments for loans restructured in 2020.

For instance, 89.3 per cent of loans restructures by the KCB Group are now performing as normal as the banks NPL ratio eases to 14.3 per cent from 14.8 per cent.

The lender has meanwhile covered 70 per cent of its NPLs through the provisions.

Peer Equity has meanwhile seen its NPL ratio retreat to 10.7 per cent from a higher 11.3 per cent and has more than enough cover for the bad loans at 103 per cent.

According the bank, 78 per cent of its restructured book is now performing. The lender had restructured an estimated Ksh.177 billion loans under the Central Bank of Kenya (CBK) guided moratorium.

NCBA Managing Director John Gachora says banks have been fast to provide buffers for potential impairments as represented by the significant provisions taken in 2020.

The loan-loss provisions represented about 103.2 per cent of the banking industry’s profit before tax (PBT) last year according to data from KBA.

“One starts taking provisions as soon as you notice there are problems. NPLs mean that the problem has since crystallized. What we saw was banks taking very large provisions last year on account of what they termed to be problems. Provisions happen long before the actual rise in NPLs,” Gachora said.

“In terms of expectations, if you see provisions coming down, it means that the expectation is the loan book has improved, and in future, you should see NPLs coming down.”