How bank profits are doubling in the middle of a crippling pandemic

In the last one week most Kenyans have been surprised by astronomical earnings by banks as the industry sees an unprecedented turnaround to profitability.

As many suffer the backlash of the COVID-19 pandemic, local banks are posting up incredulous numbers with net profits jumping by the billions.

Take the case of KCB Group whose half year profit surged by 102 per cent or Equity whose profit nearly doubled in the same period.

Other banks to have posted their earnings in the ongoing disclosure cycle include the Cooperative Bank, Stanbic Bank and Sidian Bank all of whom have seen their profits rise remarkably.

The tale behind the doubling of profits is just as incredible as the numbers.

When the COVID-19 pandemic hit last year, banks were forced to set aside billions to cover expected credit losses as distressed customers begun defaulting on loans in line with International Financial Reporting Standards (IFRS).

Further, banks handed a lifeline to customers by allowing a restructure to payments in line with guidelines by the Central Bank of Kenya (CBK) which had a domino effect of cutting bank earnings from interest income.

A total of Ksh.1.7 trillion worth of loans were restructured in 12 months to March this year.

Fast forward to more than a year later, many bank customers have resumed their loan payments handing banks a new avenue to grow their interest fed operating income while allowing the lenders to trim their provisions on expected credit losses.

Technically, the withdrawn provisions are ejected from operating costs and pushed to the profit and loss account to fuel the growth in earnings as observed.

Equity Group has for instance cut its provisions from Ksh.8 billion to a lower Ksh.2.9 billion. This implies the bank has moved Ksh.5.1 billion from overhead costs to profit as its loan asset quality improves from renewed repayments.

In contrast, KCB has cut its provisions by Ksh.4.4 billion, Stanbic by Ksh.500 million and Sidian by Ksh.80 million.

Combined with improving operating income, the two factors have rocketed banks profitability to the moon.

“It is about recognizing that we have been able to stem growth in NPLs (non-performing loans, defaulted loans) and we have started to experience a decline in the NPLs. With the remaining NPLs fully covered, this has given the Group the opportunity to have a run of top-line translating into the bottom-line because there is no provision. At the moment, the Group will only need to make provisions to cover the new loan book and not the quality of assets,” Equity Group Managing Director James Mwangi told investors on Tuesday.

“As the NPLs decline, this also gives the Group an opportunity to release the provisions.”

While banks could be accused of dropping their guard by cutting the provisions, Stanbic Bank Kenya Chief Executive Officer Charles Mudiwa says the operating environment is awash with signals of a strong economic recovery.

“We have been seeing a strong rebound in some sectors of the economy. Secondly, in some way, we are all learning to manage the crisis. Last year, we were all learning about COVID-19 and hence took the most cautious of approaches,” he told Citizen Digital in an interview on Friday 13.

But what happens when all possible provisions are walked back to profits and growth for the industry plateaus?

While it is unlikely to live to witness another doubling of profits for the industry in Kenya, KCB Group Chief Finance Officer Lawrence Kimathi maintains top-line growth for banks remain steady from extended lending and the digitization of services to customers.

“Interest income will continue to grow, the demand for credit is still there, businesses want to expand, and new businesses are coming up. We will continue growing our loan books even when the interest charged does not changed,” he said in an interview on Thursday.

“Fees will however grow faster than loans especially for us (KCB Group). We are really focusing in making sure we are issuing new products and new services that can then be monetized by charging fees.”

KCB projects its digital channels will be contributing to 40 per cent of non-interest funded income (NFI) for the Group by the end of 2023.

While there is a buzz all round on the meteoric rise in bank profitability, the CBK key metrics are on stability of the system including banks liquidity, how quick banks can turn their assets to cash to meet short-term payments, and their capital sizes.

As banks profitability took a nose dive last year, the reserve bank had its eyes focused on the stability metrics, unbothered by the size of direction of the industry’s profits.