Weakening economy pushes Kenyan banks to brink of fresh crisis

Kenyan banks are teetering on the brink of another crisis triggered by the deteriorating economic environment and the persistent Russia-Ukraine military conflict after demonstrating strong recovery from the economic fallout effects of the Covid-19 pandemic.

The lenders, who were handed a severe blow by the Covid-19 pandemic, started 2022 on a strong footing, posting double-digit profit growth in the six months to June 30, with majority announcing resumption of dividend payment to shareholders.

The lenders’ growth in profitability was largely buoyed by increased revenues from banking transactions (non-interest income) and interest income from heavy investments in government securities.

On average the industry’s gross earnings rose 9.3 percent to Ksh62.6 billion ($517.35 million) from Ksh57.3 billion ($473.55 million) in the period, according to data from the central bank.

However, the impressive performance came under a weakening economy whose growth in the second quarter (April-June) of the year fell to 5.2 per cent compared to 11 per cent in the same period last year.

Risks in the economy

The industry lobby Kenya Bankers Association (KBA) said risks in the economy – including skyrocketing inflation, weakening currency, falling forex reserves and falling revenue collections – could filter into the banking sector dampening prospects for the entire year.

Kenya inflation for September rose to 9.2 per cent from 8.5 percent in August fuelled by fuel and food prices.

Meanwhile the shilling has plunged to a record low of Ksh121 against the US dollar, exacerbating imported inflation and pushing the cost of servicing foreign debts beyond the roof.

Revenue targets

The Kenya Revenue Authority has a failed to meet its prorated revenue targets three months into the 2022/2023 fiscal year largely due to the deteriorating business environment and inflationary pressures that have forced consumers to cut on spending.

Cumulatively, the taxman has collected Ksh465.2 billion ($3.84 billion), or 22.5 percent of the original estimates of Ksh2.07 trillion ($17.1 billion) and 89.8 percent of the prorated estimates of Ksh518 billion ($4.28 billion).

President William Ruto’s administration ascended to power on the platform of economic recovery and empowerment of the economically disadvantaged majority.

The president has ordered expenditure cuts of up to Ksh300 billion ($2.47 billion) and austerity measures to ride the economic tsunami.

Concessional borrowing

Last week, National Treasury Cabinet Secretary nominee Njuguna Ndung’u told a vetting panel that he would resort to concessional borrowing to pay off expensive domestic debts in an attempt to improve the country’s finances.

American rating agency Fitch in September said Kenyan lenders face rising asset-quality risks from weaker global and domestic conditions, but expected them to deliver strong returns in 2022.

“Kenyan banks’ sector outlook is negative, mirroring the negative outlook on Kenya's sovereign rating. Operating conditions have worsened due to high inflation, risks to growth from global shocks and the harsh domestic drought,” the agency said

The asset quality of the lenders has deteriorated, with non-performing loans ratio at 14.7 percent during the six months to June 30, much weaker than the regional average.

“We anticipate continued asset-quality pressures, mainly from the small and medium-sized enterprises (SMEs) and retail loan books, which is likely to push up credit costs and increase risks to the banks' performance,” said Fitch.

Higher rates

In September, the central bank increased the benchmark lending rate to 8.25 percent from 7.5 percent signalling a regime of higher interest rates as the regulator attempted to fight inflation compounded by the government’s move to abolish subsidies on food and fuel.

As a result several lenders such as Standard Chartered Bank Kenya, Housing Finance, Stanbic bank (Kenya) and NCBA Group have notified customers that their cost of loans will rise from October.

According to Fitch the rising rates and yields on government securities could be positive for the lenders’ pre-impairment operating profit, which will provide a large buffer for likely higher credit costs.

According to the central bank, the total lending increased by only 3.3 percent in the first half of the year to Ksh3.5 trillion compared to Ksh3.4 trillion in the same period last year, attributable to an increase in credit granted for working capital and loans granted to individual borrowers, analysts at Cytonn Investments Ltd said.

Fitch-rated Kenyan banks remain constrained by Kenya's sovereign rating (B+/Negative), reflecting the concentration of their activities in the country and high sovereign-related exposure.

The large banks continue to build on their domestic franchise strengths through regional expansion in pursuit of diversification.