Non-performing loans cover from listed banks hits 59pc on rules change


Non-performing loans cover from listed banks hits 59pc on rules change
A general view shows the central business district of Kenya's capital Nairobi, April 10, 2017. REUTERS/Thomas Mukoya

In Summary

  • During the 2007/9 recession loan loss provisions hit the fan as borrowers struggled to repay their debts, the provisioning levels would however fall on the recapture of economic stability.
  • To cushion borrowers, banks have provided extensions on loan repayments by up to one year with some including payment holidays as part of emergency measures.
  • Further, the CBK has attached additional liquidity to banks amounting to Ksh.35.2 billion resulting from the lowering of the Cash Reserve Ratio (CRR) to 4.25.

Publicly listed banks non-performing loans cover hit 58.5 per cent in 2019 as the 24 months window to the implementation on new financial reporting rules closed.

The close of the window leaves the banks coverage of its non-performing loans (NPLs) aligned to expected losses from credit losses in line with the International Financial Reporting Standard (IFRS 9) on financial instruments.

The change kicked in on January 1, 2018 required banks to express both incurred credit losses but also losses in the future in a means to improve credit risk provisioning and build the resilience and capacity of entities to withstand losses brought forth by loan defaults.

The increased provisioning for the recorded and expected non-performing loans has grown in respect to the closing window to 58.5 percent from 54.6 percent in 2018.

However, the recorded growth in provisions has grown along a surge in the industry’s non performing loans pointing to a deterioration of the sector’s asset quality.

According to data from the Central Bank of Kenya (CBK), the percentage of gross NPLs to the industry’s total loan book rose to a high 12.7 per cent in February from a lower 12 percent in December with the stock of defaults growing in the manufacturing, energy and household sectors.

Analysts at Cytonn Investments warn the trend in asset quality deterioration will hurt banks bottom lines from the requirement of projecting expected credit losses.

“If the asset deterioration trend persists, this will likely impact the bank’s bottom line due to associated impairment charges, especially after the adoption of the new IFRS 9 standard,” they noted.

With an industry NPL ratio above the five year average 8.2 per cent, banks are growing cautious of new lending under the ongoing Covid-19 pandemic in spite of a raft of measures to open up additional market liquidity by the Central Bank of Kenya (CBK) last month.

“It’s fair to assume NPLs will inevitably grow. A lot of institutions are struggling with capital adequacy with some reporting that levels may deteriorate in another one to three months,” said Absa Kenya Managing Director Jeremy Awori in a March 24 investor call.

“Institutions might struggle with corresponding higher liquidity and deploying it. What you might see on new lending is a case by case basis in terms of assessing new borrowers by banks.”

The provisions on bad loans by banks are set to remain as an important indicator to the health of the economy with greater loan-loss provisioning indicating higher asset quality deterioration and tougher economic times.

During the 2007-2009 recession loan loss provisions hit the fan as borrowers struggled to repay their debts, the provisioning levels would however fall on the recapture of economic stability.

To cushion borrowers, banks have provided extensions on loan repayments by up to one year with some including payment holidays as part of emergency measures to mitigate the adverse economic effects on banking sector clients announced on March 18 by CBK.

Further, the CBK has attached additional liquidity to banks amounting to Ksh.35.2 billion resulting from the lowering of the Cash Reserve Ratio (CRR) to 4.25 on a demonstration of entities direct support to distressed borrowers at this time.

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Story By Kepha Muiruri
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