The cumulative pre-tax profit of commercial banks for the three months ended March remained flat compared to last year, marking the first time since the Covid-19 pandemic that the sector has failed to register growth, underlining the current tough economic environment.
Data from the Central Bank of Kenya shows that the lenders’ cumulative pre-tax profit for the first quarter of the year was Sh73.5 billion, equalling the amount posted over the same period last year. The performance is limited to the banks’ operations in the Kenyan market.
The banking sector has enjoyed year-on-year earnings growth for the last two decades, except in 2020, 2017 and 2008, when major one-off events occurred.
This year’s stunted growth follows a decline in interest and forex income.
The decline in interest income follows a shift in lending, with banks extending credit to the government — perceived as less risky — while shying away from the private sector.
Gross loans issued by banks rose by Sh40 billion in the 12 months to March, compared to a Sh205 billion growth in customer deposits over the same period, indicating most of the funds collected from the public were not lent to individuals and businesses, but rather held in other financial assets.
A spike in bad loans, arising from delayed government payments to contractors and a bad business environment, has seen banks become more aggressive in recovering loans than in issuing new ones.
With the ratio of bad loans to total loan book rising to an 18-year high industry average of 17.4 per cent or Sh717.5 billion in absolute defaults, banks have had to increase their loan loss provisions, which is part of their expenses.
A stable shilling since the turn of the year has denied banks’ the volatility needed to rake in forex income to match last year.
Notably, this is the first time that the banks’ cumulative pre-tax profit has stagnated due to business-related factors. The drop in 2008 followed the post-election violence of 2007, while in 2017 performance dipped after introduction of interest rate caps in 2016, while the earnings dip in 2020 was due to the pandemic.
Cost-cutting measures
Commercial banks are expected to respond by implementing cost-cutting measures. Some of the lenders reported a drop in staff costs for the first quarter of the year compared to a year earlier, signalling tough times ahead for bank employees.
Some of those who reported reduction in staff costs include Standard Chartered Bank Kenya.
Some of the lenders, such as Equity Bank Kenya, Absa Bank Kenya and Standard Chartered Bank Kenya, have reported lower rental charges as they leaned on digitisation to move away from brick-and-mortar branches.
Banks that reported flat or lower profits in the first quarter compared to a similar period last year include StanChart, Absa and KCB Bank Kenya.
Those that have gone against the grain include Equity Bank, which reported a 55 percent jump in profits posted by the Kenyan unit, a rise that followed two years of decline. Others are Housing Finance, DTB and Co-operative Bank of Kenya.
The CBK only considers the Kenyan operations. Banks have relied on improved performances by subsidiaries to soften the impact of slowing earnings growth in Kenyan banking operations.
According to data from Financial Sector Deepening (FSD) Kenya, financial inclusion in the country has plateaued, signalling that banks may no longer enjoy growth in customer numbers as inclusivity deepens.
Regional expansion and widening of product menu to allow for cross-selling are other strategies that banks are expected to adopt to ride out the current tough times.
