Small banks cut bad loan provisions by nearly half

Monday September 09 2019

Tier III lenders cut loan loss provisioning by 48.3 per cent to Sh1 billion in the six months ended June 2019 despite the rise in gross non-performing loans (NPLs).

Analysis of banks’ half year 2019 financial reports shows that the provisions of the 20 tier III lenders dropped from Sh1.99 billion in the comparative period in 2018.

This even as the stock of bad loans rose 39.8 per cent to Sh52.4 billion from Sh37.5 billion in June, 2018.

The provisions are supposed to serve as an allowance for uncollected loans and loan payments to cover eventualities such as customer defaults and renegotiated terms that yield lower than previously estimated payments.

Tier III banks near halving of provisions was the largest compared to other banks in tier I and tier II, helping reduce pace of operating expenses. This saw tier III lenders post a combined net profit of Sh2.96 billion from the loss of Sh254.7 million in half year 2018.

The cut in provisioning defies analysts’ expectation that 2019 would see increased level of loan loss provisions in the ab sence of last year’s benefit of passing the provisions through balance sheet reserves during the switch to a new accounting standard.


Genghis Capital, an investment bank, had forecast that tier I provisioning for NPLs to rise by 52.9 percent in 2019 while ICEA Lion Asset Management— a fund manager—said it expects momentum of profit growth to be weakened by higher provisions. During the review period, tier I banks- made up of eight top banks- cut their provisions by 3.7 per cent to Sh9.2 billion from Sh8.89 billion. This was despite gross NPLs rising 12 per cent to Sh179.6 billion.

Gross loans of the 11 tier II lenders rose by 1.3 per cent to Sh116.2 billion in a period that saw loan loss provisioning rise 2.1 per cent to Sh4.19 billion.

Overall, 22 out of the 40 banks analysed cut loan loss provisioning. This saw overall provisioning fall by eight per cent to Sh14.1 billion despite gross NPLs rising by 11.4 per cent to Sh348.2 billion.

The sector’s net profit rose 14.2 per cent from Sh58.8 billion to Sh67.1 billion as banks increased their lending to government.