Rising bad loans reduced banks' earnings
Cytonn Investments Management Limited finance and Investment manager Maurice Oduor speaks during the release of the full year 2015 banking sector report at the Stanley Hotel in Nairobi on April 5, 2016. PHOTO |SALATON NJAU | NATION MEDIA GROUP
What you need to know:
- Provisioning, which means setting aside money for the poor debts, increased, bringing down revenue margins for the commercial institutions.
- Central Bank of Kenya’s tough stance has forced banks to categorise their loans correctly which increased the number of bad debts hidden in their books.
- CBK has complained about careless lending by financial institutions, noting that it will assess credit risks in the market before it becomes a problem.
Tighter regulations in the financial sector last year ate into bank earnings after they were forced to cover for rising bad loans.
Provisioning, which means setting aside money for the poor debts, increased, bringing down revenue margins for the commercial institutions.
Banks increased provisioning for bad loans by up to 85 per cent, according to a report by Cytonn Investments, led by the troubled National Bank, which saw its rise by 608 per cent.
The report noted that while loans advanced by banks increased by 19 per cent, the financial institutions were slower in growing deposits, which rose by 15 per cent.
In the recent past, the sector has been accused of not fully complying with key accounting, valuation, security systems and managerial requirements as per the Central Bank of Kenya’s (CBK) Revised Prudential Guidelines 2013.
CBK’s tough stance has forced banks to categorise their loans correctly which increased the number of bad debts hidden in their books.
The regulator’s data for last year’s quarter three shows that non-performing loans jumped 07 per cent from Sh123.9 billion in June 2015 to Sh124.8 billion in September 2015.
BANKING SECTOR REMAINS STABLE
During the March 21, monetary policy meeting, CBK noted the growing credit risk and the dangers it posed to stability in the sector.
“The banking sector remains stable and resilient, however, the CBK continues to closely monitor the sector, particularly concerning credit risk as reflected in an increase in non-performing loans,” read the statement by the governor, Dr Patrick Njoroge.
Cytonn Investments head — private equity real estate, Mr Shiv Arora, said this did not pose a systemic problem as banks had adjusted.
“I do not think it is such a big problem as banks have accommodated the tough operating environment effectively. Private equity has also come in to shore up capital and assist in strategy,” said Mr Arora.
CBK has complained about careless lending by financial institutions, noting that it will assess credit risks in the market before it becomes a problem.
In a press conference on January 21, Dr Njoroge said banks were not doing enough due diligence to ensure the creditworthiness of their clients.
