Return on equity on Kenyan banks tumbles to over a decade low in Covid year

The adverse effects of Coronavirus economic fallout eroded the return to bank shareholders to multiyear lows, shaving off profits and stock prices in the market.

According to the Kenya Bankers Association, return on equity tanked below 20 per cent for the first time dropping to a low of 13 per cent.

The lower return on investors reflected overall profitability of the banking sector, which fell drastically in 2020, as profit before tax dropped by 30.9 per cent, reflecting the lowest returns since 2012.

“The industry average ROE also dropped to 13.3 per cent during the period from an average of 21.1 per cent in 2019,” Kenya Bankers State of the Banking Industry Report – 2021 read.

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“The average ROA fell to 2.0 per cent in 2020 at a pace faster than the trend declines noted over the past few years,” the report adds.

Economic impact of the Covid-19 pandemic meant that banks could not continue lending to the public aggressively as the government put in place travel curbs even as businesses across industries shut down.

It also meant that some of the businesses could not service their loans and the lenders needed to restructure their portfolios including foregoing interest payments, lengthening loan maturities or putting a freeze on loan principal.

This meant lower returns to banks and risk averse shareholders dumped the bank stakes at the Nairobi Securities Exchange (NSE) tumbling stock prices to multi year lows.

While these changes also differed across bank sizes, a comparative analysis of the banking sector’s ROA and ROE against other firms shows that the banking sector profitability reflects moderate profitability.

To survive, banks relied on lending the government, which gave them a 22.4 per cent rise in interest on government securities, foreign exchange gains (14.7 per cent) and other interest and operating income (5.4 per cent).

Interest income on loans grew slowest by 4.5 per cent while income from fees and commissions and interest on placements contracted by 7.8 per cent and 10.5 per cent.

However, the banking sector total income in 2020 rose by 6.9 per cent, higher than a 5.4 per cent growth in 2019 but was met by higher costs.

The banking industry’s costs rose by 37.5 per cent in 2020 to Kes 574.6 billion from Kes 417.8 billion in 2019, driven by the rise in interest expenses on deposits by 9.9 per cent, loan loss provisions (by 45.8 per cent), and expenses on other interest and other operating expenses (32 per cent).

However, expenses on interest on borrowed funds, deposits and placements, and general administrative costs declined by 14.2 per cent and 13.0 per cent, respectively.

As a share of total costs, general administrative expenses accounted for the largest proportion, at 41.7 per cent in 2020 slightly up from 39.4 per cent in 2019, and interest on deposits whose share declined to 22.2 per cent in 2020 from 27.7 per cent in 2019.

Other substantive cost items included loan loss provisions which accounted for 19.2 per cent of the total costs in 2020 compared to 9.4 per cent in 2019, reflecting the additional forward provisioning for loan losses that banks had to make to cover themselves against the deteriorated asset quality during the year. 

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