Kenya: Banks in Big Trouble Over Locust, Covid-19 Shocks

Kenya: Banks in Big Trouble Over Locust, Covid-19 Shocks

Residents of Mahiga-Meru village chase desert locusts using old aluminium cooking pots, iron sheets and twigs, in Laikipia County (file photo). Top Kenyan banks have yielded to the Covid-19 pandemic with grim prospects of weaker profitability, slowed loan book growth and a surge in the volume of bad loans, signaling reduced dividends for shareholders and reduced corporate tax to the government this year.

According to a special report by rating agency Fitch on eight banks that control 83 percent of the industry’s deposits and 76 percent of the total assets, weaker operating conditions have resulted in substantially lower earnings and profitability metrics for the lenders that have also borne the brunt of huge loan restructuring to protect borrowers whose loan repayments have been impacted by the Covid-19 pandemic.

The situation has been compounded by the severe locust infestation since July 2019 which could create further pressure on the banks’ asset quality through lending to the small-scale farmers and farming communities.

Debt relief measures granted to distressed borrowers to mitigate the effects of the Covid-19 pandemic and the subdued loan growth are also expected to dampen profitability.

Fitch, through its report titled ‘Coronavirus Impact on Large Kenyan Banks’ shows that the annualised average net income to average equity ratio of these large banks declined by 730 basis points (bp) to 11.6 percent in the first six months of this year.

The report dated October 8 shows that the lenders — KCB, Equity, NCBA, Co-operative Bank, Diamond Trust Bank (DTB), Absa Bank (Kenya) Standard Chartered Bank (Kenya) and Stanbic Bank (Kenya) — started the year 2020 on a weaker footing characterised by deteriorating asset quality, with an average impaired loan ratio of 11.2 percent last year compared with 9.9 percent in 2018.

KCB’s asset quality deterioration was largely driven by the consolidation of National Bank of Kenya (NBK), which pushed its impaired loan ratio upwards by 300bp to 15.4 percent in 2019.

"Risks are tilted to the downside again. The coronavirus pandemic will reverse the benefits to banks from the repeal of the interest rate cap in terms of lending growth, asset quality and earnings," said Vincent Martin, an analyst at the rating agency.

Personal lending

According to Fitch, banks with the largest exposures to personal lending are particularly exposed to higher loan impairments, with other stressed sectors including manufacturing and trade.

Based on Fitch’s estimates, the most exposed (based on 2019 figures) to personal lending among the large […]

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