Kenyan Tier-1 Banks Increase Loan-Loss Provisions by 45.8% in Q3 2023 Amid Operating Challenges

Summary: Eight tier-1 banks in Kenya, including Equity, KCB, and Stanbic, have collectively increased their loan-loss provisions by 45.8% to KSh62.5 billion in the third quarter of 2023. This substantial increase is attributed to the anticipation of massive defaults in a challenging operating environment. The loan-loss provision figure is close to what these lenders set aside during the pandemic in 2020 when borrowers were offered debt repayment holidays. Notably, three of the eight banks—Equity Bank, I&M, and Stanbic—have set aside record amounts in loan-loss provisions during the review period.

Key Points:

In Q3 2023, the eight large banks in Kenya increased their loan-loss provisions by 45.8% to KSh62.5 billion, compared to KSh42.9 billion in the same period in 2022.

The loan-loss provisions are seen as insurance cash against potential defaults in a tough economic environment.

Equity Bank, I&M, and Stanbic set aside record amounts in loan-loss provisions during the review period, surpassing figures from a similar period in the pandemic year (2020).

Equity Bank increased its provisions by 96.6% to KSh19 billion, Stanbic increased by 56.6% to KSh4.48 billion, and I&M increased by a third to KSh4.4 billion.

Non-performing loans (NPLs) in Kenya have been rising, indicating a challenging operating environment influenced by factors such as devaluation of the shilling, high-interest rates, and inflation.

CBK data shows the NPLs to gross loans ratio increased to 15% in August from 14.2% in the same period last year.

NPLs surged to a record KSh611.4 billion for the first eight months of 2023, compared to KSh505 billion in the same period last year.

Businesses in Kenya are facing challenges due to high-interest rates, a weaker shilling, and sky-high inflation, impacting their ability to service loans.

The new tax measures implemented in Kenya have also reduced disposable income for households and businesses, contributing to increased loan defaults.

The increase in loan-loss provisions is viewed as a sign of tough times ahead, reflecting a challenging business environment.

Analysis:

1. Economic Challenges Impacting Loan Repayment: The substantial increase in loan-loss provisions by Kenyan tier-1 banks underscores the economic challenges faced by businesses and individuals in the country. Factors such as high-interest rates, a weakened shilling, inflation, and new tax measures have contributed to increased loan defaults and necessitated higher provisions.
2. Record Provisions by Selected Banks: Equity Bank, I&M, and Stanbic, among the eight banks, have set aside record amounts in loan-loss provisions. This indicates a recognition of the severity of the economic challenges and the need to buffer against potential defaults in their loan portfolios.
3. Non-Performing Loans on the Rise: The rise in non-performing loans (NPLs) and the ratio of NPLs to gross loans indicate the stress in the banking sector. Businesses and individuals are grappling with financial difficulties, making it challenging for them to meet their loan obligations.
4. Impact of High-Interest Rates and Tax Measures: High-interest rates, driven by the central bank’s measures to control inflation, have contributed to increased defaults. Additionally, new tax measures have reduced disposable income, affecting the ability of households and businesses to service their loans.
5. Signs of Tough Times Ahead: The commentary from industry experts and insiders suggests that the increase in loan-loss provisions is a sign of tough times ahead. The challenging business environment and reduced disposable income for borrowers pose significant risks to the banking sector.
6. Strategic Financial Management: The banks’ strategic move to increase loan-loss provisions demonstrates prudent financial management in anticipation of potential credit risks. This approach aligns with regulatory requirements and industry best practices.

Conclusion: The surge in loan-loss provisions by Kenyan tier-1 banks reflects the economic headwinds faced by businesses and individuals in the country. It highlights the banking sector’s proactive response to manage potential credit risks amid challenging operating conditions. Monitoring the impact of these provisions on the banks’ financial performance and the overall economic recovery will be crucial in assessing the resilience of the financial sector in Kenya.

BDA