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Tough times for commercial banks as profits dip

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Regulator points to faster growth in expenses compared to growth in income as the main cause

By Tullah Stephen

Kenya’s banking industry recorded a five per cent decline in profits for the year 2015 according to Bank Supervision Report 2015.

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The report released in August by the Central Bank of Kenya (CBK), the industry regulator,  showed pre-tax profit for the industry declined from KSh141.1 billion (US$1.4 billion) in the year ended December 2014 to KSh134 billion (US$1.3 billion) in 2015.

This was the first time the industry was experiencing such a decline in a span of sixteen years. CBK attributed the decline to a faster growth in expenses, which in the period under review outpaced the growth in income for the commercial banks.

The banks’ income grew by 9.1 per cent in 2015 while expenses grew by a margin of 16.3 per cent over the same period. This was driven by the increase in their interest expenses and loan loss provision — an amount set aside by banks to cover bad loans or credit.

The top seven banks, going by the CBK report, control 70.3 per cent of the total pre-tax profit, an increase from 61 per cent recorded in 2014.

“The increase is attributable to the movement of two banks to the large peer group and increase in the amount of profits made by banks in the large peer group,” says the regulator.

The sector’s gross loans increased by 21 per cent to KSh2.2 trillion (US$24.2bn) in June 2015 from KSh1.8 trillion (US$19.8bn). This was attributed to an increase in lending to wholesale and retail trade, restaurants and hotels, and manufacturing.

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Gross non-performing loans (NPL) also grew by 22 per cent from KSh101.7 billion to KSh 123 billion over the year ending June 2015.

“The increase in NPLs is due to the delays in payments to suppliers and contractors as well as challenges in the business environment,” reads the CBK report.

The industry’s average liquidity – a measure of the industry’s ability to fund an increase in assets and meet obligations, remained strong during the year ended December 2015.

Average liquidity ratio stood at 38.1 per cent compared to 37.7 per cent in December 2014. The increase is attributed to the growth in total liquid assets as compared to growth in total short term liabilities. Total liquid assets grew by 13 per cent while total short-term liabilities grew by 12 per cent.

Customer deposits also grew by 8.73 per cent from KSh2.29 trillion (US$22.9 billion) in December 2014 to KSh2.49 trillion (US$24.9 billion) in December 2015. The growth, according to the regulator, was driven by increased deposit mobilization by banks as they expanded their outreach to leverage on mobile platforms.

Banks deposit base, the average volume of customer deposits available to a bank for investment at any given time regardless of withdrawal options available to customers, stood at KSh2.6trn (US$28.6bn) in June 2015, compared to KSh2.1trn (US$23.1bn), up 20 per cent on the year. This according to the regulator was partly as a result of remittances from Kenyans living abroad. As at May 2016, CBK estimates that Kenyans abroad had remitted US$2 billion back home.

However despite the stability and resilience the sector saw two non-systemic banks, Dubai Bank Limited and Imperial Bank Limited, were placed in receivership by the regulator in the second and third quarters of 2015. Chase Bank was also put under receivership though it has soon begun operation.

The ripple effect of the South Sudan conflict was also felt by the Kenyan banks. Assets held by subsidiaries of Kenyan banks in South Sudan, among them KCB Group Ltd., Equity Group Holdings Ltd., CFC Stanbic Holdings Ltd. and Co-operative Bank of Kenya Ltd., declined by 50 per cent during the year to 58.8 billion shillings following the devaluation of the South Sudanese pound, the regulator reported.

According to the regulator, Kenya’s growing middle class will continue to boost retail banking and products such as mortgages and personal loans. This is also likely to continue to drive adoption of credit cards, which have high penetration among high net-worth customers. “As the busy Kenyan market continues to grow and mature, and with clear sights towards the huge potential of the region and the rest of Africa, domestic banks should have a very busy period ahead of them,” concluded the report.

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