Something is amiss in banking sector as the statistics indicate

So, what is the state of the banking sector as we approach the August 8 General Election?

I have been reading through data based on a review of the Q1 2017 regulatory disclosure that banks must publish quarterly in fulfilment of the requirements of prudential guidelines by the Central Bank of Kenya.

The statistics make for very depressing reading.

I have come to the conclusion that we are at a point where policymakers must approach the banking sector with more intellectual honesty.

We must to stop kidding ourselves that everything is fine in this sector.

LIQUIDITY ISSUES

What trends do the statistics show? About a dozen banks are facing challenging liquidity issues.

The statistics show instances where liquidity has fallen to below the regulatory minimum of 20 per cent.

Secondly, from the data on interbank activity, you will see that the big banks don’t mark lines to smaller ones, concentrating on lending to their fellow tier 1 banks. 

In fancy lingo, the big banks are only spreading liquidity horizontally -- not vertically, forcing the small banks to access liquidity from their counterparts.

AVERAGE DEPOSIT

The data shows that small banks are lending to one another at rates more than double what the big boys are doing among themselves.

The data on average deposit rates reveals that a number of small banks  have been taking deposits at rates higher than the seven per cent limit set by the rate-capping law.

Considering that rates on loans are capped at 14 per cent, and with margins squeezed to the limits, the whole situation raises questions about viability of small banks.

Do small and medium-sized banks have a viable business model anymore?

Yet another sign of liquidity difficulties is the fact that the number of banks that are utterly dependent on the Central Bank window have increased to four.

NON-PERFORMING LOANS

The data also shows a trend of mounting non-performing loans. According to the statistics, non-performing loans in the small banks are at an average of 19 per cent, with large banks at an average of eight per cent.

Plainly, the data shows that we have banks that are losing one shilling for every five shillings lent out.

The statistics document half-a-dozen cases where non- performing loans are over 30 per cent.

PROFITABILITY

How about profitability?  Several banks have cost income ratios that are significantly higher than those of the top ten profitable banks.

I also found it interesting from the data that a number of the small banks are yet to reprice their loans and are, therefore, still charging customers rates above the rate cap of 14 per cent, running the risk of regulatory penalties.

In sum, the data reveals that too many of our small banks are facing a dangerous cocktail of declining margins, declining liquidity, and deteriorating asset quality.

Where did the rain start beating us? 

PAYING SALARIES

The truth of the matter is that these trends started showing long before the interest rating capping law came to town.

It is a reflection of the declining profitability trend in the corporate sector.

Is it not a sign of the times we live in that a company such as Nakumatt, the largest retailer and bellwether for the economy, with linkages across the economy, is being reported in the media to be having problems with paying salaries to its employees?

MAINTAIN CREDIT LINES

The excess levels of non-performing loans we are seeing in the balance sheet of banks have come about because they have lent money to companies are not able to pay back.

We all know that banks under stress tend to maintain credit lines to companies they already have a relationship with even if those companies were struggling.

 The banks are usually reluctant to discontinue lending out of the fear that such action will recognise their own losses on the loans.

That is perhaps how we have ended up in a situation where we have too many indebted companies that are technically still in business but unable to grow, but still access credits that should otherwise go to stronger companies.

SCIENTIFIC DATA

Where can I get analytical and scientific data on the share of bank loans being channelled to fund expansion as opposed to debt roll-overs?

It is the type of data we needed to understand why official GDP statistics keep telling us how well the economy is doing when half of our banks are zombies, and when the big supermarkets are struggling.

Sustainable growth will not come until we arrive at a situation where credit starts to support the right businesses and industries. 

The rate-capping law came at the wrong time. It just made the situation worse.

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