Kenyan banks rake in profits despite turmoil in South Sudan

As violence continues to ravage South Sudan, Kenyan commercial banks that branched to the world’s newest state will be happy that their subsidiaries have turned a corner from the huge losses they made soon after the fighting broke out.

Local banks with operations in the oil-rich nation have defied odds to rake in impressive revenues compared to their subsidiaries in other East Africa Community member states that are peaceful.

Violence in South Sudan saw the Central Bank of Kenya warn that there was a likelihood of a rise in non-performing loans this year due to a slowdown in economic activity.

The banking regulator warned that the political crisis in South Sudan could impact borrowers’ ability to repay their loans.

CBK data shows that banks were holding a total of Sh80.6 billion in bad loans as at December last year, up from Sh61.6 billion a year earlier on account of the turmoil in South Sudan and delay by the Kenyan government to pay contractors.

MONEY SET ASIDE

Equity Bank’s 2014 half-year financial results however show a 65 per cent drop in impairment charges – money set aside as cover for bad loans – from Sh1.47 billion in 2013 to Sh0.52 billion this year.

The lender controls 40 per cent of the banking industry in South Sudan, while Kenya Commercial Bank (KCB) accounts for 42 per cent, with its non-performing loans ballooning to Sh1.1 billion from Sh558 million in 2013.

East Africa’s largest bank by market capitalisation however saw its South Sudan business contribute 7.1 per cent to its profits for the half-year to June 2014, more than Tanzania, Uganda, Burundi, and Rwanda combined.

The lender with the largest branch network, at 21, in Africa’s youngest nation made Sh831 million in the first six months of the year despite being forced to close three of its branches.

Unlike in other markets where lenders’ core business revolves around growing the loan book, business in South Sudan centres around non-funded income, given that lending is yet to pick up in the young nation.

“Despite the turmoil, the outlook for South Sudan still remains positive in foreign exchange trading and transactional income,” KCB’s chief executive officer, Mr Joshua Oigara, said at a recent investor briefing.

TAKING THE LEAD

A recent report by consultancy firm Moody’s projected the banking sector in East Africa to grow by 15 and 20 per cent in the next two years respectively, with banks in Kenya taking the lead.

The report said local banks are adequately-funded to lead regional lenders in business expansion over the next two years owing to larger capital bases and investment in mobile technology.

The report titled East African Community: Credit Issues for Banks said Kenyan banks have been more aggressive than their regional counterparts in tapping the EAC market for additional business.

KCB is not taking its foot off the gas pedal, remaining bullish in its South Sudan outlook with plans to open two more branches in the oil-rich nation.

“In the month of August, two additional branches will be opened in Juba as business now starts to pick up in the country,” Mr Oigara told investors last month.

Apart from KCB and Equity Bank, Cooperative Bank and CFC Stanbic also have operations in the turmoil-stricken nation.

CFC Stanbic’s half-year revenues from South Sudan shot from Sh196 million last year to Sh345 million in 2014, riding on non-funded income. The bank operates only one branch in Juba.

DIFFERENT PICTURE

The lender, listed on the Nairobi bourse, is in the process of converting its Juba branch into an independent subsidiary in a bid to expedite decision-making and improve performance.

The holding company of CFC Stanbic Bank and SBG Securities entered South Sudan in April 2012 and broke even by the end of that year — having barely operated for eight months. This points to a market with massive potential.

The impressive performance paints a different picture from what was expected after violence broke out in South Sudan last December, paralysing business activities and threatening the profitability of lenders.

Like CfC Stanbic, Cooperative Bank has indicated that its South Sudan unit is on the verge of breaking even after 10 months of operation.

“Our South Sudan subsidiary, which started operations in September 2013 is on the verge of breaking even and contributing positively to our profitability from this year,” said the managing director, Mr Gideon Muriuki.

The lender entered Juba in a share ownership structure with the government of South Sudan in which the former holds a 51 per cent stake while the bank has 49 per cent, which it is to transfer to the cooperative movement in the country in three years.

REGISTERED LOSSES

The Cooperative Bank intends to replicate in South Sudan its model of developing business partnerships with cooperative societies that has given it access to Kenya’s 12,000 saccos and their over 10 million customers.

Lenders operating units in Uganda, Tanzania, and Rwanda post losses and profits in almost equal measure.

The Central Bank of Kenya’s annual bank supervision report for 2013, released in June, showed that Kenyan banks with subsidiaries in neighbouring countries suffered losses of more than Sh1.1 billion last year.

Eight of the 11 lenders operating in Uganda, Tanzania, Rwanda, Burundi, and South Sudan reported losses in their subsidiaries in the year ended December 2013.

The loss-making units included NIC, Equity, Commercial Bank of Africa, Bank of Africa (BOA), Imperial, and Cooperative.

“Four of the subsidiaries that registered losses before tax were operating in Uganda, indicating stiff competition,” says the report. Two were in Tanzania and another two in Rwanda.

The report said the 11 banks reported a total pre-tax profit of Sh5.2 billion from their regional subsidiaries, reflecting flat growth compared to the 2012 earnings of Sh5.1 billion.

BAD LOANS

Equity Bank’s Rwanda unit posted its third consecutive pre-tax loss of Sh139 million in the year to December 2013, compared to Sh233 million a year earlier and Sh59 million in 2011. It opened shop in Rwanda in 2011 and so far has nine branches.

NIC Bank made a loss of Sh395 million last year from its Tanzanian subsidiary, compared to a profit of Sh150 million in 2012. The results were blamed on a significant increase in the lender’s volume of bad loans.

NIC Bank Uganda, wholly-owned by NIC Bank Ltd, stayed in the red with a net loss of Sh555,000 last year compared to a loss of Sh24 million in 2012, when it began operations.

The Bank of Africa Kenya, on its part, registered a loss of Sh225.4 million in 2013 from its Uganda operations compared to a profit of Sh294.1 million in 2012.

BOA Kenya owns a 50.01 per cent stake in BOA Uganda.