How forward-looking IFRS 9 shows risk structure in Kenyan banks
Absa Bank cut loan loss provisions 47 percent to Sh4.7 billion from Sh9 billion in December 2020.
The cut in line with what we have seen in the industry is partly behind the huge profits posted by lenders in the full-year to December 2021.
But it is also indicative of the application of the new forward-looking IFRS 9.
In 2018 Kenyan banks joined their global peers in adopting the International Financial Reporting Standards 9 (IFRS 9), ushering in a significant shift in accounting for financial instruments.
IFRS 9 introduces the concept of provisioning for expected losses. This is a forward-looking impairment model, requiring banks to set aside funds, by way of provisioning, in anticipation of loan losses.
In 2020 banks provisioning spiked as the lenders anticipated sharp defaults on Covid-19 pandemic.
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It showed that lenders were risky and saw Central Bank of Kenya allow banks to restructure their facilities and give loan repayment moratorium to avoid a collapse of the financial markets.
This year, however, banks have done the opposite cutting down provisions for bad loans after economic sentiment improved and customers began repayment of their frozen loans.
Absa Kenya CEO Jeremy Awori said the bank gave six months to a year moratorium and as of December last year 95 percent of creditors had resumed making payments.
“We restructured over Kes62 billion of our portfolio and that was over 60,000 customers. We are glad that over 95 percent of these accounts are now regularised. It shows how important it is to work with customers during difficult times,” Mr Awori explained.
This has given the banks to make positive projections on future payments in line with IFRS 9.
The bank also saw a slight increase in gross NPL to Kes19.8 billion from Kes17 billon unlike the expected doom when they increased provisions in 2020.
This shows the bank has been agile and had overprovisioned.
Absa Bank CEO says they have been keen on ensuring they study a business well before lending.
This has seen them avoid notorious defaults such as Kenya Airways (KQ), Mumias Sugar, Multiple Hauliers where peer lenders have sunk billions of shillings in non-performing loans.
