Banks’ profit growth falls as loan book stagnates in first six months

Banks’ profits in the half-year grew by only 2.1 per cent as the loan book stagnated at Sh2.2 trillion, sparking fears that the low credit uptake could depress economic growth.

The lenders posted a total of Sh78.5 billion pre-tax profit for the six months to June compared to Sh76.9 billion posted in a similar period last year. The loan book has remained largely the same since the end of last year.

In the first half of last year, the banks’ profit grew by 8.3 per cent, which was slower than in similar period of the previous three years when profit growth was in excess of 15 per cent.

“The sector’s profit before tax increased by 2.1 per cent to Sh78.5 billion from Sh76.9 billion in June 2015,” said CBK governor Patrick Njoroge in a statement.

Banking industry has historically posted double-digit growth, including highs of 31 per cent in 2006 when public confidence in the sector grew following restored economic stability from 2004.

The recent collapse of Imperial and Chase Bank has hurt public confidence and made investors to shy away from banking counters on the Nairobi Securities Exchange (NSE). The institutions underperformed against the broader stock market.

“With investors becoming wary of quality of reported numbers and persistent increase in non-performing loans, year to date the Standard Investment Bank’s Bank Index has declined 13.5 per cent, underperforming the NSE 20 Index, which is down 12.8 per cent,” said Standard Investment Bank (SIB).

In the past, banking counters have consistently outperformed the rest of the market with investors seeking a slice of the highly profitable sector.

SIB noted that general market index started outperforming the banking indicator in April after the Central Bank of Kenya (CBK) placed Chase Bank, the third bank within a year, under statutory management.

Stricter supervision by the CBK has also revealed ills in the sector manifested by sudden piling of bad loans.

READ: CBK set to penalise banks that understate bad loans for profits

The ratio of non-performing loans was 8.4 per cent at end of June compared to 5.7 per cent at a similar time last year. However, the ratio was flat compared to end of last December.

Standard Chartered has been the best performing counter among listed banks with its share price up 18.5 per cent from the beginning of the year.

NIC Bank has been the worst performer, dropping 26.6 per cent closely followed by Barclays that shed 26.5 per cent.

Analysts at SIB said they had slashed their expectations of the banking sector performance by 14.4 per cent, reflecting investors’ concerns about the sector. However, Dr Njoroge remained optimistic of the sector, citing improved liquidity and growth in assets.

The sector’s liquidity ratio stood at 40.4 per cent double the statutory minimum of 20 per cent. Concerns remain on the distribution of the liquidity hugely in favour of large banks, leaving small lenders to incur a high cost of funds.

To cover the cost of funds, the small lenders are forced to charge high lending rates that are then copied by large banks, which have more funds to lend. The high interest rates have resulted in slower lending.

The CBK did not have a firm figure for percentage credit growth for up to June.

“We are looking at the numbers again because something is not quite adding up. I wouldn’t want to confirm a credit growth number; we need to understand what is driving because it is more than interest rates,” said Dr Njoroge.

Data from the CBK shows that the rate of growth in lending to the private sector has been slowing down to 14.3 per cent in April compared to 19.8 per cent last October, underlining the adverse effects of high interest rates.