In tough economic times, banks make money, but they also lose a tonne of it as businesses begin to crumble and default, forcing lenders to take most of the money they make to plug these holes. In practice, banks must raise provisioning as non-performing loans (NPLs) rise. Setting aside money for anticipated loan losses is a process known as provisioning.

Bank provisioning for bad loans, part of the profits set aside to insure defaults for the top seven lenders who control, the sector in Kenya doubled from Kes12.9 billion in the first three months of 2022 to Kes24.9 billion this year signaling tough times ahead for the bankers.

NCBA Bank was the most cautious of this trend and has put away Kes7.8 billion of its profits to cover bad loans. This is despite NCBA being at the middle of the park in terms of how much loans plunged into default.

KCB's huge spike in bad debts

KCB Group took only Kes4.1 billion to cover defaults despite its huge spike in bad debts followed by Stanbic Bank whose international exposures forced it to higher provisioning standards, setting a side Kes4.4 billion for defaults.

"We expect the increase in NPLs to have a negative impact on capital as banks increase their provisions which is likely to eat into the capital," said analysts at AIB-AxysAfrica.

Gross NPLs increased by an average of 21.20 percent in the quarter that ended on March 30 compared to a similar period in 2022, placing Kenyan banks in an increasingly challenging operating environment.

ABSA Kenya experienced the biggest year-over-year growth in NPL ratio in the quarter under review, at 59.72 percent, which analysts at AIB-AxysAfrica attribute to exposure to unsecured retail loans.

However, at Kes31.1 billion, Absa Kenya was the lender with the smallest portion of bad loans in the industry. In the quarter, KCB Group was leading the pack with a whooping Kes176.4 billion in default, a 45 percent from Kes130.9 billion in quarter one last year.

Households' worsening financial health

Equity bank had Kes80.2 billion in default while Cooperative Bank had Kes59.6 billion. NCBA reported Kes45.1 billion worth of default, Stanbic Kes29.2 billion while Standard Chartered retained its bad NPL portfolio at Kes22.5 billion.

While Kenya’s business sector seems fine at the surface, beneath the cover there seems to be a festering problem between banks and customers trying to accommodate each other’s cash flows and restructuring obligations.

The Central Bank of Kenya 2021 FinAccess Household Survey indicates that the financial health of respondents deteriorated to 17.1 percent in 2021, compared to 21.7 percent in 2019. This implies that that only 17.1 percent of the respondents could adequately and comfortably meet their day-to-day needs, cope with shocks and had the ability to invest in future goals like saving for old age.

And as costs from additional taxes, imported inflation and poor weather conditions have conspired to push individuals and businesses into default.

Deteriorating asset quality for banks

An increasing NPL ratio is an indicator of deteriorating asset quality for banks. It suggests that a larger portion of the loans extended by the bank is at risk of not being repaid, potentially leading to a decline in profitability and financial stability.

Read also: What is worse than default

The industry NPL ratio has risen to 14.9 percent in May 2023, compared to 14.6 percent in April, but the leading lenders ratios are way above the industry averages which lays bare how big the problem may be hiding in rather quiet financial statements.

In the first quarter, AIB-AxysAfrica analysis shows regional lender KCB's NPL ratio increased marginally to 17 percent, which is the highest in Kenya's banking industry. StanChart, NPL ratio closed the quarter at 15 percent, while Coop Bank (14 percent), NCBA (13 percent) followed in that order.

DTB had dud loan ratios below industry averages at 12 percent, I&M Bank recorded 11 percent in NPL ratio while Equity Bank came seventh at 10 percent. While Absa Kenya NPL ratio increased fastest at 59.72 percent, the lender ranked eighth in NPL ratio standing among Kenya's top banks.

Bank	NPLs			Provision
	2022	2023	2022	2023
KCB Group	130.9	176.4	2	4.1
Equity Group	59.3	80.2	1.8	3.4
Coop Bank	49.4	59.6	1.5	1.5
NCBA	39.7	45.1	6.2	7.8
Stanbic Bank	24.5	29.2	0.4	4.4
StanChart	22.5	22.5	-0.086	1.3
Absa Kenya	19.4	31.1	1.1	2.4

Depreciation of Kenya shilling

Overall, Equity cited a turbulent macroeconomic environment marked by sticky inflation, high interest, and the depreciation of Kenya shilling against the US dollar as its justification for the need for caution and prudence in provisioning.

"Our NPL is at 9.1 percent against the industry average ratio of 14 percent. Our comfort is in our provision coverage," Dr James Mwangi, Equity Group CEO, told investors.

Regional rival, KCB Group, provisions surged by 99 percent to Kes4.1 billion, on account of rising credit risk and the impact of forex devaluation in Kenya.

The bank said adequate loan loss provisioning was a prudent step against the backdrop of a challenging business environment, which has greatly impacted the lender's asset quality. KCB's net profit for the first quarter this year dipped to Kes9.75 billion from Kes9.85 billion in March 2022.

Despite a rise in Coop Bank's gross NPLs to Kes55.6 billion, the bank struck a cautious stance, increasing coverage levels on potential defaults to a high of 72 percent or Kes1.5 billion allocations in provisions in the first quarter of 2023.

Provisioning reduces available capital

Banks are required to maintain a certain level of capital adequacy as mandated by regulatory authorities. A higher NPL ratio erodes a bank's capital base, as provisioning for bad loans reduces the available capital.

If a bank's capital falls below the required levels, it may face challenges in meeting regulatory compliance. In such cases, banks may need to raise additional capital through various means such as issuing new shares, selling assets, or seeking external investors.

According to CBK credit survey, banks expect to intensify their credit recovery efforts to steer the industry from defaults. The targeted borrowers are spread across personal and household, trade, transport and communication, manufacturing, real estate, building and construction sectors.

And as such Equity shocked the market by placing two companies, TransCentury and East African Cables, both listed at the Nairobi Securities Exchange under administration. While the matter proceeds to court the very fact that creditors are now seizing listed companies should shock the country because the problem may be bigger and more ominous for the economy.

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