Banks suffer sharp earnings fall in first-half on bad loans
Key banking sector players posted sharp falls in earnings in the first half of 2020 as they increased their provision for bad loans, some by up to four times to cover mounting defaults, even as softening Treasury yields left little room for maneuver.
According to reports for the first six months, KCB and CFC Stanbic are some of the players whose earnings dropped sharply with Co-operative Bank of Kenya recording a marginal fall.
KCB said it restructured loan facilities worth Sh101 billion in the last half of the year.
The bank lifted its loan loss provisions nearly four times to Sh11 billion as provision expense for potential loan losses up from Sh3 billion provision during a similar period last year.
Central Bank of Kenya reported that a third of banking sector loan book has been restructured.
Compliance with the new International Financial Reporting Standards 9 also left the lenders with less margins as compared to earlier years when market analysts such as Citibank accused local lenders of under provisioning for loans.
The choppy business environment caused by coronavirus spread is suffocating businesses and households rendering them unable to sustain their loans payments.
“The second quarter was the toughest in our recent history as the pandemic hurt economic activity across markets.
Most of the key sectors were nearly shut down and our customers continue to face unprecedented challenges,” said KCB Group CEO and Managing Director Joshua Oigara.
Shareholders are expected to endure a dry 2020 after most Kenyan banks declared full year dividends for the year 2019 to shareholders early in the year.
Equity Bank, however, later cancelled dividend awards to shareholders on account of uncertainty.
Equity Bank, the largest by customer base saw her profitability contract by 14 per cent in the first quarter and is expected to report a further drop in earnings.
Banks which rely heavily on Treasury bills such as NCBA and CFC Stanbic saw less earnings as yields dropped due to too much idle money running away from empty streets in search of safety in arms of the government.
The lenders who are running away from struggling small businesses to risk free T-bills are expected to “face stiff competition from fund managers, insurance, and high net worth individuals who are keen on government bonds,” Goodson Capital Partners Eric Munyoki reckons.
Banking stocks are set to face even tougher trials in the second half of the year as mounting Covid-19 infections accelerate loan defaults.
Banks are announcing double digit drops in half year earnings on account of defaults with KCB leading with a 40 per cent fall in earnings.
CFC Stanbic announced a 37 per cent fall in earnings last week even as analysts warned that the worst was yet to come.
Co-op Bank increased its loan loss provision by 57 per cent to Sh1.87 billion in the last half from Sh1.1 billion.
It has also restructured terms of Sh39.2 billion loans since Covid-19 started and says it is still actively considering customer applications on a case by case basis.
A sharp fall in interest rates also put pressure on Treasury bill yields in which banks are major players, suppressing earnings for risk averse banks.
The volume of restructured loans is expected to cross the one trillion mark before year end after CBK announced that at least Sh844 billion of loans has already been restructured.
Kenya’s Covid-19 cases continued to escalate surpassing 30,000 mark by Sunday the Ministry of Health, said that 271 people tested positive for the disease, raising the national tally to 30,120 and nearly 500 deaths even as experts called for grass root testing.
The banking sector, however, remains resilient as it has one of the highest returns on investment on the continent.