By JAMES ANYANZWA

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Kenya’s top banks pumped in about Ksh619.22 billion ($4.72 billion) in fresh capital to sustain operations and maintain resilience after the new reporting standards kicked in demanding higher provisioning for expected credit losses on booked loans.

The fresh capital comprised Ksh486.89 billion ($3.71 billion) and Ksh132.34 billion ($1.01 billion) worth of core capital and Tier II capital respectively.

Core capital mainly consists of share capital, share premium plus retained earnings while tier-II capital (supplementary capital) covers mainly revaluation reserves, subordinated debt and statutory loan reserves.

Nine banks —Equity, KCB, Co-operative Bank, NCBA, Absa (Kenya), Standard Chartered Bank (Kenya), I&M ,Diamond Trust Bank (DTB) and Stanbic Bank Kenya — that control 75 percent of the industry’s assets raised their total capital to Ksh1.11 trillion ($8.47 billion) in December 31, 2023 from Ksh496.98 billion ($3.79 billion) in December 31 2017, according to their audited financial statements.

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Allocating money to cushion against bad debts commonly referred to as ‘provisioning’ usually reduces bank profit and capital, thereby making banks more vulnerable to breach of regulatory capital adequacy and liquidity ratios.

“IFRS 9 forces you to make certain provisions and provisions eat into the capital of the bank. So, everybody is just trying to ensure (by raising capital) they are on the safe side and are well cushioned in the event shocks come in the market,” says Habil Olaka, the outgoing CEO of the Kenya Bankers Association (KBA).

The increased capital was designed to cushion the lenders from the rise in loan loss provisions, which more than tripled to Ksh121.32 billion ($926.1 million) from Ksh34.44 billion ($262.9 million) during the period under review.

The nine banks’ net profit, however, more than doubled to Ksh187.45 billion ($1.43 billion) from Ksh85.42 billion ($652.06 million) owing to injection of fresh funding.

“Most banks have been utilising a mix of both retained earnings and debt,” said Daniel Kuyoh, a Nairobi-based independent analyst.

“Ideally, it’s a mix of retained earnings and debt/supplementary capital to shore up reserves.”

The IFRS 9 which came into effect on January 1, 2018 was developed in response to global financial crisis (2008-2009) following calls by a group of 20 richest nations of the world and other global bodies for a more timely recognition of loan losses and a forward-looking loan impairment model.

It requires banks to make provisions for expected loan losses, thereby transiting from the International Accounting Standards (IAS) 39 that only recognised loans that had already turned bad.

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The new reporting standards seek to improve credit risk provisioning by reporting institutions to enhance their resilience and capacity to withstand losses occasioned by loan defaults.

The central bank had spared Kenyan lenders from the requirements of the IFRS9 for one year (2018) and also granted the institutions a five-year (January 1, 2018- January 1, 2023) transition window to strengthen their capital positions.

The one-year revenue protection window allowed banks to avoid the drastic impact on profit and capital position while the five-year window was designed to allow banks to gradually build their capital buffers.

The window elapsed in January 2023, implying that the lenders are in a better position to prudently manage their credit risks without compromising on their revenues and the ability to absorb losses in the event of distress.

“That time interval was required to give banks adequate time to build up their reserves in the event that the IFRS 9 application brings the capital requirement below the threshold required by the regulations,” says Dr Olaka.

DTB had projected the adoption of IFRS 9 to result in incremental impairment provisions of between one to two percent from the provisions held as at December 31, 2017.

“The impact is primarily attributable to increases in the allowance for credit losses under the new impairment requirements,” the bank said in its 2017 annual report.

Stanbic Bank, on the other hand, said through its 2017 annual report that the lender expected implementation of the IFRS 9 to reduce the capital ratio by approximately 50 basis points (bps) leading to about Ksh2.3 billion($17.55 million) in balance sheet impairments, an increase of 71 percent on IAS 39’s balance sheet impairments (including interest in suspense).

“The transition period was used by some of the banks to comply with the regulatory limits in the interim period as retained earnings,” says Eric Musau, head of research at Standard Investment Bank (SIB).

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“Other banks, especially the multinationals complied immediately IFRS 9 came into effect globally.”

The industry’s core capital to total risk weighted assets decreased marginally from 16.5 percent in 2017 to 16.1 percent in 2022, though well above the minimum statutory ratio of 10.5 percent.

Total capital to total risk weighted assets increased from 18.8 percent to 19 percent against a statutory minimum of 14.5 percent.

Core capital to total deposits declined from 18.9 percent to 17.2 percent.

In 2022, 13 commercial banks were in violation of the Banking Act and CBK Prudential Guidelines compared to nine commercial banks in the previous year 2021.

Most of the violations were in respect to breach of single obligor limit of 25 percent of core capital mainly due to decline in core capital in some banks that have continued to report losses.

In 2022, two commercial banks failed to maintain the minimum core capital required of Ksh1 billion ($7.63 million), five commercial banks failed to meet the minimum statutory required ratio for total capital to total risk weighted assets of 14.5 percent while five banks failed to meet the statutory minimum required ratio for core capital to total risk weighted assets of 10.5 percent.

Three banks failed to meet the statutory minimum required ratio for core capital to deposit ratio of eight percent.

The CBK says most banks have adopted a tight credit risk appraisal, ensuring that the loan facilities are well secured and that alternative sources of repayment are available.

During the period (2017-2013), a combination of factors impacted the banks’ loan including Covid-19 pandemic, high interest rate, currency depreciation and inflation.

The level of NPLs stood at 9.4 percent in 2016 and crossed the double-digit mark in 2017 at 12.3 percent, before increasing marginally to 12.7 percent and 12.6 percent in 2018 and 2019, respectively. Latest CBK data shows that the industry NPL ratio has risen to 15.5 percent in the 12-months period to February 2024, the highest in close to two decades from 14.8 percent in December 2023.