Seven of Kenya’s top banks tapped into Sh32.3 billion worth of capital reserves to absorb the impact of mounting loan defaults and report robust earnings in the nine months ended September, the latest industry analysis shows.
The move followed January’s coming into force of the more conservative international accounting standards IFRS9, which require banks to provide for expected loan losses rather than those already incurred.
IFRS9 supplanted the previous dual accounting process that allowed banks to accumulate large statutory loan loss reserves, which they have been using to meet the higher provisioning requirement for non-performing loans.
Banks have had the option of gauging provisions for their bad debt using either Central Bank of Kenya (CBK) prudential guidelines or international accounting standards. If the latter showed a bigger number, a bank could simply take the hit on its profit and loss account without increasing its loan loss reserves.
Conversely, if the CBK process produced a larger sum, a bank could provide for the lower number and book the difference in its loan loss reserve.
But with the introduction of IFRS9, banks have responded by spending most of their loan loss reserves to reduce their provisions and ultimately boost the bottom-line.
“The initial impact of IFRS9 implementation from January 2018 was in capital as the increase in impairment charges would have been too significant to pass through income statement,” a banking sector analyst told the Business Daily.
“It is very obvious that most of Tier I banks have deviated significantly from CBK guidelines, which resulted in a big hit on capital, while significantly reducing impairment charges on the profit and loss accounts.”
Going forward, banks will take most of the hit in their profit and loss accounts, lowering the profits of those with relatively riskier loan books.
“You would certainly expect the impact of IFRS9 to go through profit and loss accounts from next year,” said Habil Olaka, the chief executive of Kenya Bankers Association (KBA).
An analysis of the banking industry’s performance shows that KCB released the largest amount of loan loss reserves of Sh12.4 billion, sparing its income statement, which showed a 19.6 per cent net profit jump to Sh18 billion in the nine months ended September.
KCB’s provision for bad debt fell 42.6 per cent to Sh1.7 billion even as gross defaults remained flat at Sh34.7 billion. Other banks also lowered their provisions.
Equity, whose net profit rose 7.6 per cent to Sh15.7 billion in the same period, saw its reserves drop by Sh10.2 billion. The lender’s provisioning for bad loans dropped to Sh1.3 billion from Sh2.8 billion despite gross non-performing loans rising to Sh26.4 billion from Sh20.6 billion in a similar period a year earlier.
Co-op Bank, Barclays and Stanbic reserves dropped by Sh3.5 billion, Sh1.7 billion and Sh1.6 billion respectively, while their net earnings jumped 8.1 per cent, two per cent, and 46.7 per cent to Sh10.3 billion, Sh5.4 billion and Sh4.7 billion.
DTB and Standard Chartered Bank (Kenya) also took capital hits of Sh1.4 billion and Sh1.2 billion respectively. Their net earnings rose 10.7 per cent and 33.8 per cent to Sh5.2 billion and Sh6.3 billion respectively.
“These amounts (capital eroded) are deemed to have led to lower impairment charges in the first year of IFRS9 adoption, driving up profitability and reducing capital reserves,” the analyst said.
The new accounting standard requires provisions to be made based on factors such as a bleaker outlook for a borrower’s industry even if the customer himself has not defaulted, a move meant to make banks more conservative in their lending in the wake of the 2008 global financial crisis.
The IFRS9 adds another major challenge to banks that has seen lending margins drop significantly following the introduction of interest rate controls.
Analysts said the twin challenge of more stringent accounting rules and narrower lending margins will force banks to retain more of the profit, and reduce the cash available for distribution to shareholders.
Those that choose to raise their dividends risk tapping their shareholders for new capital in the coming years, re-introducing a wave of rights issues that has waned at the Nairobi bourse.
French Embassy Grants 2023 – Funds for NGOs
AUCTIONEER LOSES BID TO STOP HIS SENTENCING
Khaligraph Jones celebrates Femi One on AFRIMMA win
M-Pesa hardens Africa grip with Sh43.3 trillion deals in 12 months
Kisumu phones saga lands at National Police Commission – Weekly Citizen
Panic in Energy parastatals as Chirchir makes comeback – Weekly Citizen
Let’s discuss urgently whether to embrace or reject GMO foods
Government to explore opportunities for Kenyans abroad, Ruto says
DTB recruits 100 University Students for Job Shadowing Program
EACC moves to court recover grabbed public land worth Ksh 100M
Senegal MP slaps female lawmaker, sets off brawl in parliament
IEBC Commissioner Justus Nyang’aya of Cherera 4 Resigns
Life lessons from the football bonanza in Qatar World Cup
12-2022 – Last World cup group matches, Which World cup games will KBC air today
Hottest bachelors of 2022 – Ghafla! Kenya
Magadi Road Drivers Sacco join TAWU Workers Union
CJ Koome Presides Over The Swearing In Of Nine Members To The ‘Cherera 4’ Probe Tribunal
Karen, Muthaiga to host NCBA Junior Tour
Govt Announces Destruction of 213 Cars Imported by Kenyans
Billionaire Humphrey Kariuki among 12 National Investment Council members
Business News3 days ago
Call for use of technology to combat cattle rustling
Columns And Opinions7 days ago
To correct ills of Jubilee regime, Ruto should invest in counties
Tech2 days ago
Here’s the TECNO Phantom X2 Pro in photos, plus specifications
Sports6 days ago
Messi magic reignites Argentina, France into World Cup last 16
General News5 days ago
The News Brief: Fireworks as Raila calls anti-Ruto meetings
Business News2 days ago
Everything You Need To Know
Tech2 days ago
Spotify Kenya Wrapped; Top Streamed Songs and Artistes 2022
Columns And Opinions3 days ago
Vipingo Safari Tour enters final round with trio tied at the top