Asset quality for listed banks deteriorated in the third quarter of 2020 with non-performing loans (NPL) rising by 2.6 per cent to 12.4 per cent up from 9.8 per cent reported same time last year.
An analysis of performance of the lenders by investment management firm Cytonn attributes the increase in bad loans to the effects of Covid-19 pandemic on the economy.
“The deterioration in asset quality was due to the coronavirus-induced downturn in the economy, which led to an uptick in the non-performing loans,” reads the report.
The 12.4 NPL ratio recorded in the third quarter is higher than the five year average of 8.5 per cent.
According to the report, high NPLs were witnessed in sectors such as tourism, real estate, hospitality and transport and communication mainly due to the disruption of business and operations caused by the pandemic.
Consequently, banks increased their non-performing loans coverage to 59.2 per cent in the third quarter up from 57.8 per cent in a similar period in 2019 in line with IFRS 9, an International Financial Reporting Standard, whichrequires banks to provide for both the incurred and expected credit losses.
The Cytonn report says it expects this to affect banking sector profitability negatively for the year.
“We expect higher provisional requirements to subdue profitability during the year across the banking sector on account of the tough business environment,” says Cytonn in the report.
However, it adds, commercial banks held back funds released from the lowering of the Cash Reserve Ratio (CRR) in March by the Central Bank of Kenya (CBK).
The banking sector report says commercial banks failed to advance new loans from accrued customers, but held on it to build up liquidity buffers.
Noting that banks are also not lending aggressively due to higher credit risk, the investment firm foresees a slower growth in loans in Financial Year 2020 and thereafter if the pandemic persists.
To offer customers relief against the effects of Covid-19, the banks restructured loans, placing moratoriums on both interest and principal payments for a period of three months to one year.
As at the end of October 2020, the total amount of loan restructured stood at Sh1.4 trillion, representing 46.5 per cent of the banking sector loan book.
As of August, KCB Bank had restructured loans amounting to Sh105 billion, Equity Sh92 billion, Diamond Trust Bank Sh64 billion and NCBA Sh58 billion.
Absa Bank had restructured Sh63 billion, Cooperative Bank Sh39.2 while Standard Chartered had restructured Sh22 billion.
In a weekly report issued on Friday, Dyer and Blair Investment Bank said it expected Absa, one of the listed banks, to issue a profit warning this year and issue nil dividend this year projecting a 57.6 per cent drop in income compared to last year due to the pandemic.
“We are cautiously optimistic that come FY21, Absa and its peers will receive an approval from CBK to transition to risk-based lending.
As such, we opine that Absa will return to profitability and revert to its high dividend yield status once the turbulent environment stabilises,” said Dyer and Blair in the report.
Most banks have a reported a decline in earnings due to the effects of Covid-19 pandemic on the economy.
Core earnings per share recorded a weighted decline of 32.4 per cent in the third quarter, compared to a weighted growth of 8.7 per cent recorded same time in 2019.
- As reported by most of the banks, the decline in the earnings was mainly attributable to the increased provisioning levels, as they covered for downgraded facilities.
- The year was characterised by heightened activity in mergers and acquisitions including the acquisition of Jamii Bora by Cooperative Bank and Equity Bank acquiring 66.5 per cent of Banque du Congo, among others.
- Cytonn says with the Microfinance Bill 2019 of increasing the minimum on core capital requirements still at its pilot stage more mergers and acquisitions would enable the unprofitable and/or smaller banks to manage the requirement.