High rates lead to 6pc decline in banks’ profit

A slight reduction in lending rates and rising non-performing loans depressed commercial banks’ profits in the quarter ending September this year.

The profit before tax of the 43 commercial banks declined by 6.6 per cent to Sh31 billion, compared with Sh33.2 billion in a similar period that ended in June this year.

According to Central Bank’s Quarterly Performance Report for the banking sector released last week, the banks’ total income also declined by 4.1 per cent to Sh88.6 billion from Sh92.4 billion in the second quarter of 2013.

Although interest rates have been reducing marginally following CBK’s reduction of the benchmark lending rate to 8.5 per cent, the rates are still high at the current average of 16.96 per cent, leading to a surge in gross non-performing loans (NPLs). The average lending rate stood at about 13 per cent in early 2011.

The value of NPLs rose by 3.1 per cent to Sh79.7 billion in September from Sh77.3bn in June this year.

“The increase in NPLs is partly attributed to high interest rates and reduced economic activities during the period towards and after the March 2013 polls,” the report said.

In the review period, six out of 11 sectors registered an increase in NPLs by Sh3.2 billion, forcing banks to enforce strict risk management procedures and enhance their credit administration measures.

These sectors include trade, manufacturing, building and construction, tourism, restaurant and hotels, energy and water, and mining and quarrying.

The value of personal or household loans, the highest at Sh389.3 billion in September compared with Sh376.9 billion in June, experienced the greatest NPLs of Sh21.6 billion in the period. In June, NPLs in this category stood at Sh21.9 billion.

“The banks experiencing an upsurge in NPLs have put in place stringent risk management practices and enhanced their credit administration procedures to mitigate against credit risk,” said the CBK.

This also follows increased usage of credit sharing information systems by banks in the period to enhance credit assessment standards. In the period, the number of credit reports requested by banks increased by 23.6 per cent to 348,144 reports from 310,775.

As at the end of September, 13 banks had been authorised to offer agency banking services. Since the launch of the services in 2010, a total of 21,816 agents have been contracted, facilitating over 69.2 million transactions valued at Sh366.8 billion.

Overall, the sector’s assets rose to Sh2.62 trillion in September 2013, a 4.4 percentage rise from Sh2.51 trillion in June this year.

CBK expects the sector to maintain growth momentum on the back of a stable macro-economic outlook, domestic and regional expansion by banks and increased use of information technologies.