Kenya’s retail banks post low first quarter earnings

Kenya’s three largest retail banks recorded huge drops in profitability during the three months to March 31, against a backdrop of weakening interest income on loans, rising volumes of bad debt and slower growth in fees and commissions.

Despite rosy growth figures released to the public, KCB, Equity and Co-op Bank lost a combined Ksh1.12 billion ($11.2 million) of their net earnings in terms of real cash generated from trading activities over the three-months period.

LOWER PROFITS

A review of the lenders’ unaudited financial statements shows that the three banks, which are listed on the Nairobi Securities Exchange, made a combined Ksh1.02 billion ($10.2 million) in additional profit in the three months to March 31, much lower than the Ksh2.14 billion ($21.4 million) in the same period last year, a more than 50 per cent decline.

Equity Bank, which has operations in Tanzania, Uganda, Rwanda, South Sudan and the Democratic Republic of Congo, recorded the highest drop in net earnings, with its additional net profit made during the period declining significantly to Ksh285 million ($2.85 million) this year from Ksh1.03 billion ($10.3 million) last year.

It was followed by KCB Group, whose additional profit fell by 33 per cent to Ksh590 million ($5.9 million) from Ksh892 million ($8.92 million). Co-op Bank made Ksh150 million ($1.5 million) this year compared with Ksh220 million ($2.2 million) last year, accounting for a more than 30 per cent drop.

KCB has regional operations in Uganda, Rwanda, Tanzania, Burundi and South Sudan, and Co-op Bank operates a subsidiary in South Sudan through a joint venture with the country’s government.

According to the financial statements, Equity's total net profit for the three months to March 31 was Ksh285 million ($2.85 million) down from Ksh1 billion ($10 million) in the same period last year, while that of KCB was Ksh590 million ($5.9 million) from Ksh892 million ($8.92 million).

Co-op's net profit was Ksh150 million ($1.5 million) down from Ksh220 million ($2.2 million) in the same period last year.

According to analysts at AIB Capital, margins in the banking industry are expected to come under pressure as lenders increase provisions in compliance with the new International Financial Reporting Standard (IFRS9), which demands higher provisioning for bad loans.

“We expect a pick-up in provisioning going forward as the cost of risk, which decreased last year due to the adoption of IFRS9, normalises,” AIB said in its market update report last week.

The Central Bank of Kenya had spared the lenders from charging increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), which that saw banks record lower expenses and higher profits. CBK allowed banks to charge their increased loan-loss provisions against the retained earnings in the balance sheet and not in the profit-and-loss account, sparing them a drastic dip in profits.

ACCOUNTING STANDARDS

However, from January this year, banks have to make full provisions in compliance with the new accounting standards, which will negatively impact their earnings.

Equity’s total net earnings for the three months to March 31 increased by five per cent to Ksh6.15 billion ($61.5 million) from Ksh5.86 billion ($58.6 million) in the same period last year.

In that same period, Equity Bank’s net profit had increased by Ksh1 billion ($10 million).

The lender’s gross non-performing loans (NPLs) rose 62 per cent to Ksh29.39 billion ($293.9 million) from Ksh18.1 billion ($181 million), with the Tanzanian and South Sudan subsidiaries posting the highest volumes of bad loans.

Equity’s Tanzanian and South Sudan subsidiaries constituted 32 per cent and 13 per cent of the lender’s total loan book respectively during the three months under review.

The bank’s interest income grew six per cent to Ksh 13.49 billion ($134.9 million) from Ksh12.66 billion ($126.6 million), while non-interest income, which comprises mostly fees and commissions earned from banking transactions, increased seven per cent to Ksh7.18 billion ($71.8 million) from Ksh6.71 billion ($67.1 million) during the same period.

KCB group’s net earnings increased by 11 per cent to Ksh5.77 billion ($57.7 million) from Ksh5.18 billion ($51.8 million) during the period under review, with interest on loans and advances rising by six per cent to Ksh13.38 billion ($133.8 million) from Ksh12.57 billion ($125.7 million)

KCB’s interest earnings from government securities also increased by seven per cent to Ksh3.23 billion ($32.3 million) from Ksh3 billion ($30 million), while its fees and commissions on banking transactions fell to Ksh1.88 billion ($18.8 million) from Ksh2.54 billion ($25.4 million). Its gross NPL reduced to Ksh38.82 billion ($388.2 million) from Ksh43.77 billion ($437.7 million).

During the period under review, Co-op’s net earnings increased by four per cent to Ksh3.59 billion ($35.9 million) from Ksh3.44 billion ($34.4 million), as its interest on loans and advances declined by 14 per cent to Ksh7.17 billion ($71.7 million) from Ksh8.35 billion ($83.5 million).

The lender’s interest income on government securities increased by 39 per cent to Ksh2.78 billion ($27.8 million), from Ksh1.99 billion ($19.9 million). Fees and commissions on banking transactions increased 33 per cent to Ksh2.87 billion ($28.7 million) from Ksh2.15 billion ($21.5 million). Gross NPLs increased four per cent to Ksh29.72 billion ($297.2 million) from Ksh28.36 billion ($283.6 million).