Political stability will cut bad loans, says UK’s Exotix

Customers at a banking hall in Nairobi. FILE PHOTO | NMG

What you need to know:

  • Exotix Partners says slow economy contributed to rise in non-performing loans in 2017.
  • The slow growth in credit, coupled with the rising levels of non-performing loans, meant that banks reported lower interest income, resulting in a 9.4 per cent fall in net earnings to Sh76.6 billion for the nine months to September 2017.
  • Exotix said profitability is likely to recover this year if the quality of the assets (loan book) improves, especially if the banks are successful in pushing for a review of the rate cap law.

A comparatively stable political environment this year and improved performance of the economy are key to lowering the non-performing loan (NPL) levels of the banking sector, UK-based Exotix Partners say.

They project the ratio of non-performing loans to total loan book for the banking sector will fall at least 1.4 percentage points this year, led by large tier one banks which have traditionally had lower NPLs compared to smaller rivals.

The gross NPL for local banks reached 10.5 per cent by the end of September 2017, driven by a poorly performing economy that put a strain on borrowers, amid a prolonged General Election in the year.

“We think loan quality in Kenya has likely reached its nadir; political stability should provide a favourable environment for NPLs to decline,” it said Exotix in a banking sector report.

“We expect NPL levels to come down, mainly in the second half of 2018, which would ease the burden of provisions. Banks that are important to watch include DTB #ticker:DTK, Co-operative Bank #ticker:COOP and Equity Bank #ticker:EQTY. These have traditionally had lower NPLs than the industry and a recovery for these would point to a broader sector improvement.”

The main sectors affected by the deterioration of the asset quality for banks were trade, manufacturing, personal household, real estate and construction.

The Central Bank of Kenya (CBK) credit survey report for the third quarter last year showed the banking sector gross loans increased by only 1.02 per cent from Sh2.37 trillion in June 2017 to Sh2.39 trillion in September.

The slow growth in credit, coupled with the rising levels of non-performing loans, meant that banks reported lower interest income, resulting in a 9.4 per cent fall in net earnings to Sh76.6 billion for the nine months to September 2017.

Exotix said profitability is likely to recover this year if the quality of the assets (loan book) improves, especially if the banks are successful in pushing for a review of the rate cap law, which could trigger a rise in lending volumes.