Stanbic Bank is anticipating a surge in defaults through the course of the year prompting the lender to increase insurance cover for bad debts at a time its non-performing loans are on a decline.
The Pan African lender set aside Kes2 billion from its profits as loan loss provisioning up from Kes998 million at a time its gross NPLs declined from Kes24 billion to Kes23.7 billion.
As the regulator increases interest rates to counter inflation and dollar outflows, banks are anticipating borrowers will struggle to meet their repayments even as businesses sales tumble amid high cost of goods and a raft of new taxes.
Already Kenya has witnessed high profile defaults with Equity Bank seizing TransCentury and East Africa cables, two companies listed on the Nairobi Securities Exchange, while EcoBank has gone for the assets of a regional oil marketer Hashi energy.
“We increased our loan loss provisions in line with IFRS accounting policies for facilities that didn’t meet the set performance milestones. Overall, our credit loss ratio (CLR) at 2.18 eprcent is consistent with the full year 2022 CLR of 2.21percent,” Stanbic Bank told Maudhui House.
“The elevated impairment provisions are also reflective of the heightened credit risk in the market driven by inflationary pressures, and higher interest rates. Lastly, notwithstanding the accounting provisions, we continue to work with our affected customers to find win-win solutions for them and the Bank,” the lender said.
Kenyans banking sector had been recovering from post Covid-19 slump on double digit private sector loan growth and interest rate increases as the regulator approved risk based pricing as well as rise in the Central Bank Rate.
Stanbic Bank posted a 41.8 percent rise in half year profits to Kes6.7 billion on stronger loan growth and trading in foreign currency.
The Pan-African lender saw interest incomes nearly double to Kes12.6 billion on strong loans growth over the period.
The lender has lent out Kes244 billion as at June up from Kes217 billion in a similar period last year which has come with its risks.
Lenders have been increasing loan rates in recent past in line with hikes in the Central Bank Rate and short term Treasury Bills that will see most of them charge borrowers upwards of 20 percent.
Stanbic Bank Kenya, for example, will start charging 18.57 percent on its mobile loans from August having lifted its base lending rate to 13.15 percent from 12.58 percent as a result of the hike the Central Bank Rate.
While lenders are keen to earn more, they reckon higher prices will discourage private sector lending and lead to a spike in defaults.
The Central Bank on Wednesday held the benchmark rate unchanged at 10.5 percent after inflation eased amid ongoing concerns that the transmission of the last tightening cycle had constrained lending conditions.
Read also: Cost of defaults on bankers double
Cheap cash for intermediation
“The ongoing transmission of higher interest rate policy signals announced in late June 2023 continues to trigger cautious and tighter lending conditions,” Kenya Bankers Association said in a research note.
Banks are also starting to pay a higher price for deposits as investors seek attractive rates from rising rates of government paper.
Stanbic paid an extra Kes1 billion on its deposits at Kes3.6 billion signaling the current struggle to secure cheap cash for intermediation.
Small lenders are especially in trouble and are facing higher cost of funding as they compete with the larger players like Stanbic Bank for depositors chasing higher returns in the current high interest rate environment while struggling to access liquidity in a tight market.
Small lenders doubled the average amount borrowed from other banks at a higher cost indicating the desperation to meet capital compliance amid high interest rate environment.
The average value traded increased to Kes22.9 billion from Kes12 billion in the previous week at a time the interbank rate surged to 17.38 per cent on August 3, marking a significant rise from the 14.84 per cent recorded on July 27.
This has the potential to disrupt their ability to meet customer demands and adequately support economic growth through lending to businesses and individuals.