Covid-19 shock dims earnings prospects for EA banks for 2020

East Africa’s listed banks have reported either flat or reduced profit for the first three months ended March 31, setting the pace for a year of subdued performance as the Covid-19 pandemic stifles economic activity.

The banks’ first quarter performance shows both interest and non-interest income came under immense pressure, as loan loss provisions increased sharply.

A steep drop in growth of the loan books in the face of uncertainties triggered by lockdowns and restrictions of movement to curb spread of the deadly virus indicates that it will not be business as usual for the lenders, who are accustomed to reaping huge profits even in economic downturns.

“Banks will remain sceptical on lending (especially to retail and SMEs). Expect them to put cash in government securities but that cannot guarantee 100 per cent absorption of new deposits,” said Eric Munywoki, a financial analyst at Goodson Capital Partners.

Mr Munywoki predicted that the lenders will have to compete with fund managers, insurance companies, institutional investors and high net worth individuals who are also looking to buy low-risk government securities, hence shrinking their profit margins.

Shareholders also face diminished prospects for dividend payouts, with some already having to contend with cancellation of last year’s disbursements.

Maendeleo Bank Plc (Tanzania), Bank of Kigali, Equity Bank, Standard Chartered Bank (Kenya), Stanbic Bank Kenya and I&M holdings all recorded reduced profits while mortgage lender Housing Finance sank deeper into the loss making territory in the first quarter.

Absa Bank Kenya and Co-operative Bank announced flat profits, while KCB and Diamond Trust Bank recorded single-digit growth in net earnings between January and March.

RISK-FREE INVESTMENTS

The Covid-19 pandemic hit Africa’s shores in mid-February, triggering a flurry of lockdowns and restrictions on movement.

Global credit ratings agency Moody’s Investor Service last month changed the outlook on the long- term deposit ratings of KCB, Co-op Bank and Equity Bank to negative from stable.

The review followed Moody’s affirmation of Kenya government’s B2 rating but change in its outlook to negative from stable.

Analysts reckon that banks will not be ready to take risks of lending to the private sector, whose businesses have been hard hit by the Covid-19 pandemic.

This will effectively leave the lenders sitting on idle cash, meaning that even depositors will not get good returns.

Regional central banks have implemented intervention measures to boost liquidity in the banking system and ensure that lenders extend the relief to borrowers whose cash flow positions have been affected by the Covid-19.

In Kigali, the National Bank of Rwanda lowered the Central Bank Rate (CBR) to 4.5 per cent from five per cent and lowered the reserve requirement ratio to four per cent from five per cent to ease liquidity in the banking system amid the Covid-19 disruption.

The NBR also eased prudential requirements to exceptionally allow banks to restructure outstanding loans for borrowers facing temporary cash flow challenges arising from the Covid-19.

In response, banks had, as at April 10 2020, restructured 7,952 loans worth rwf 255 billion ($266 million).

In Uganda, the Bank of Uganda (BoU) reduced the CBR to eight per cent from nine per cent to boost liquidity while in Kenyan the Central Bank reduced the Cash Reserve Ratio (CRR) to 4.25 per cent from 5.25 per cent, releasing Ksh35.2 billion ($352 million) to the banking sector.

The CBK has also lowered the CBR to seven per cent from 8.25 per cent in March this year.

On the other hand, Tanzania’s central bank, Bank of Tanzania (BOT) reduced its statutory minimum reserve requirement ratio to six per cent from seven per cent and cut the discount rate to five per cent from seven per cent.

THINNING DEMAND

However, while the lenders have made several loan restructuring for the borrowers, demand for new loans has thinned, shrinking interest income on loans and advances — the lenders’ key source of revenue.

“Despite the increased liquidity in the country, banks will not be willing to lend to the private sector and, as such, the excess liquidity will be channelled back to government securities,” said analysts at Cytonn Investments Ltd in a note to investors.

“As the effects of the Coronavirus continue to be felt in the economy, we believe banks will find it difficult to lend to businesses and individuals as the risk levels have increased and in turn exert upward pressure on interest rates.

The new International Financial Reporting Standard (IFRS 9) regime also calls for increased provisioning for all loans including government securities before they go bad.

The accounting standard requires banks to report their loan loss provisions through their profit and loss statements instead of through the balance sheets as was the case before.

“We expect the cost of risk to worsen in Quarter 2 (April-June) and beyond depending on when the economy re-opens and recovers, said Edwin Chui, head of research & strategy at Dyer & Blair Investment Bank. The Bank of Uganda (BoU) affirms the prediction that the Covid-19 pandemic is likely to reduce demand for credit on account of slackening economic activity, at least in the short-term. “Slackening economic activity will have a toll on non-performing loans as these businesses may be unable to service their debt obligations,” said BoU in a report.

***

THE CHALLENGE

Regional Central banks have implemented intervention measures to boost liquidity in the banking system and ensure lenders extend the relief to borrowers whose cash flow positions have been affected by the Covid-19 pandemic.

However, while the lenders have made several loan restructuring for the borrowers the demand for new loans has thinned while lenders are also reluctant to issue new loans, in a move that is expected to wipe out interest income on loans and advances.