Kenya’s banking industry remains sound and stable despite being buffeted by the effects of the Coronavirus (COVID-19) pandemic.
This is according to a report by the Kenya Bankers Association which indicates that’s the industry’s overall profitability and contributions to the national budget dropped to a nine-year low in 2020.
This was on the back of the COVID-19’s negative impact on the economy, particularly the trade, manufacturing and agriculture sectors where banks have restructured a majority of assets.
Dubbed ‘State of the Banking Industry (SBI) Report 2021’, the report reveals that banks’ profits before tax dropped by 30.9 percent — the lowest level since the year 2012, attributable to a depressed economic performance and quality of assets held by banks during the year.
The report reveals that provisioning for loan losses increased by 47.5 percent to Sh198.1 billion during the period, from Sh134.3 billion in 2019, with loan loss accommodations absorbing 45.7 percent of non-performing loans compared to 40.2 percent in 2019.
At the same time, the industry’s average Return on Assets declined to 2 percent, a pace faster than trend declines noted over the past few years.
In addition, the industry’s average Return on Equity scaled down to 13.3 percent from an average of 21.1 percent recorded in 2019.
The report further reveals that banks in the country have been committed to supporting the government on its COVID Economic Recovery plan with a focus on key sectors that drive output and employment, particularly the trade sector.
Compared to other sectors, the banking industry’s financial performance in 2020 saw a lower total income growth following rising operating costs largely driven by increased expenses on loan loss provisions.
The industry’s net interest margin also dipped marginally as the cost of funding, on average, remained largely unchanged. These developments differed across bank sizes.
Despite the growth slowdown, the industry continued to withstand market shocks arising from the pandemic.
The KBA-SBI Report indicates that the sector’s outlook for the year 2021 appears stable, supported by adequate capitalization and liquidity levels.
The industry’s total capital adequacy ratio rose to 19 percent in 2020 from 18.8 percent in 2019, above the statutory minimum requirement of 14.5 percent, supported by an increase in the total capital which outpaced the growth in total risk-weighted assets during the period.
Commenting on the report, KBA Chief Executive Officer Dr. Habil Olaka said the banking sector players continue to review and enhance their business models, seeking to leverage frameworks that promise efficiency gains, particularly through the adoption of technology-based innovations.
“Cognizant of market risk, growing competition, increasing sophistication of customer expectations, as well as the dynamism in the regulatory environment, the overarching challenge for the industry is to continue investing resources towards remaining at the frontier while underpinning economic recovery,” Dr. Olaka said.
The banking sector’s total assets expanded by 12.4 percent in 2020, to Sh5.4 trillion from Sh4.8 trillion in 2019, driven by a faster expansion in non-loan assets — mainly investments in government securities — which grew by 18.5 percent as gross loans and advances rose by 6.7 percent.
Net loans and advances increased by 9.1 percent in 2020 to close at Sh2.93 trillion from Sh2.63 trillion in 2019. However, the asset composition saw minimal changes in the year.
Meanwhile, the banking system’s deposits maintained a strong growth trajectory, expanding by 13.1 percent up from 8.3 percent in 2019 to close at Sh4.11 trillion. This was reflective of asset reallocation driven by high uncertainty.
The buildup of deposits during the year outpaced gross loans growth, enhancing liquidity in the banking system.
The industry’s deposit-to-liability ratio rose marginally to 88.5 percent in 2020 from 88.1 percent in 2019, indicating the sector’s strong reliance on wholesale funding to cut costs on the liability side of the balance sheet.
Kenya Bankers Association Research and Policy Director Dr. Samuel Tiriongo said analyses of banks’ tax contribution showed the industry contributed Sh42.4 billion in 2020 down from Sh55.4 billion in 2019, largely reflecting the depressing effects of the pandemic on incomes.
“While this represents a 23.6 percent drop in the tax contribution, it highlights the extent to which the sector would have contributed more to tax revenue had it not borne most of the weight of supporting other sectors of the economy. In fact, the implicit tax rate of the industry rose to 39.1 percent in 2020 from 35.7 percent in 2019,’’ added Dr. Tiriongo.
At the close of the year 2020, banks had collectively raised about Sh1.7 billion for the COVID-19 Emergency Response Fund, an intervention without which many hospitals and health workers would have been in dire need.