Never let a crisis go to waste; Kenyan banks are not.

Lenders are taking advantage of the low expectations from shareholders for dividends and the regulator relaxed rules to clean up their houses to start from a clean slate next year.

Despite the Central Bank of Kenya allowing banks to restructure their loans that face difficulties, the top seven listed banks have used their profits to write off, Sh31.7 billion in bad loans for the half-year ended June.

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KCB has set aside Sh11 billion from their bottom line as provisions as insurance for bad loans by the half-year, the biggest provisioning in the sector followed by Equity Bank who's provisioning stood at Sh8 billion while NCBA had set aside Sh7.6 billion, Absa set aside Sh5.3 billion and Cooperative Sh1.8 billion.

Ronak Gadhia, Director - Sub-Saharan Banks at EFG Hermes says some of the banks have been making provisions on legacy NPLs, which might be hard to recover (e.g provisions made on loans to Nakumatt, Kenya Airways, Athi River Mining etc).

“Banks have made additional loan loss provisions on legacy NPLs because the underlying NPL cover was low and collateral value has declined due to the correction in the real estate market,” he said.

“Pre-COVID, banks had some loans which were underperforming (e.g in the real estate sector), which have become non-performing after the outbreak of the pandemic – banks were unable to restructure this type of loans and they have therefore become non-performing and banks have had to make significant provisions for these (e.g. increase in NPL formation at KCB, Equity and Absa Bank),” he said.

Signs that Banks were cleaning bad books emerged after CBK allowed them to give personal borrowers up to 12 month holidays and restructure SME loans Banks.

The moratorium has helped banks restructure up to 30 per cent of their loan book (as at June 2020). Without this moratorium, the level of NPLs and loan loss provisioning for the same would have been much higher.

According to the CBK Monetary Policy Committee statement, banks have restructured loans worth Sh844.4 billion which is a third of the total outstanding loan book of Sh2.9 trillion between March and June this year.

Out of this, Sh604 billion has been restructured to trade, real estate, manufacturing, transport and communication.

CBK also announced that banks will have to seek approvals before declaring dividends for the year. This means that the bank shareholders are not looking forward to any dividends and banks can use the profits made this year to write off the defaulting loans.

Some banks have accrued pro-active loan loss provisions due to the uncertainty of the pandemic; some of the restructured loan might still become NPLs after the moratorium periods end if the economy recovery is weaker than expected.

This may lead to a spike in COVID- related auctions, bankruptcy and other enforcement, after the end of the restructuring periods.