Take financial reports seriously

A few weeks ago in this column, I took issue with the delay by the Central Bank of Kenya of publication of the “2019 Annual Bank Supervision Report”. Hardly two weeks later, this key regulatory report was finally published.

What interesting trends and what insights does it reveal about the state of our banking sector?

The report reveals a disturbing tale of vastly different and diverging fortunes for large banks compared to the category of banks classified as medium and small.

On a closer look at the statistics, you will see that nine large commercial banks accounted for 75 per cent of total assets and customer deposits of the sector. The numbers also reveal that this elite group of banks increased their total assets by Sh504 billion in 2019. The ‘Big Nine’ also increased customer deposits by Sh343 billion.

How do these numbers compare with performance of the bottom 31 banks?

But this category also suffered a Sh103 billion reduction in assets and lost Sh68 billion in deposits. They also managed to corner a whopping 90 per cent of banking sector earnings by pre-tax profits.

Is it not amazing that in 2019 the average top-tier bank generated more earnings than the bottom 31 banks combined? We need to go back to the debate on policy-led consolidation of our banking system. 

Deliver transformation

We have recently seen an increase in the spate of market-led mergers and acquisitions. But it is clear that this cannot deliver the transformation to a competitive sector with fewer, larger and better capitalised banks.

It is time CBK and the National Treasury seriously pursued policy-led bank consolidation instead of exposing this critical sector to the vagaries of market-led consolidation.

In 2014, the presidential task force on parastatal reforms recommended 12-17 as the optimal number of banks for Kenya. South Africa, with the most developed banking sector on the continent, has just 19 banks with five giants accounting for 89 per cent of banking assets.

As we debate consolidation of bank, let’s also debate whether Kenya can afford the luxury of three credit reference bureaus (CRBs) that struggle to remain afloat.

Let’s debate whether there isn’t a strong case for a single consolidated credit information repository that CRBs access to offer value-added services. Banks waste resources reporting the same credit information to three CRBs with similar databases.

The CBK report shows Kenya has a measly 29,000 mortgages for a country with about 20 million households. Our banking sector is woefully incapable of playing a meaningful role in the largest investment that households make over their lifetime. 

Granted, the government recently created Kenya Mortgage Refinance Company. But whether it will cure this problem or not remains debatable, given that it is premised on the on-lending model, which had been tried before with little success.

Some experts believe that a mortgage financing model based on securitisation has a better chance in our circumstances.

And how have our commercial banks fared in intermediation, their core mission? This basically means gathering many small deposits and lending them out in larger sums to viable borrowers and projects with the potential to generate the highest returns. The economy and society then benefits through this allocative efficiency of shifting resources.

Fear of bad loans

Yet commercial banks slipped further in the wrong direction on this core mission. First, they continued the unhealthy exposure to Treasury bills, as evidenced by the sky-high 49.7 per cent average liquidity ratio, twice the 20 per cent statutory minimum.

Maintaining sky-high liquidity can only mean one thing: Banks continue to invest a disproportionate share of their assets in T-Bills, effectively starving the real economy of capital and financing.

The banks channelled a staggering 36.9 per cent of customer deposits into T-Bills, a level mostly unchanged from the previous year’s 36.5 per cent.

It used to be argued that the reluctance by banks to lend to the real economy was due to the fear of bad loans. But that does not wash because, when you look at the data, gross non-performing loans only increased marginally in 2019.

We used to be told that interest rate caps were a big factor. Yet even after the caps were repealed in November 2019 , there is no evidence from the data that the situation has changed in any major way.

Which brings me back to the subject of delay in the release of the annual bank inspection reports. Until FY 2014, they would be issued in July or August. However, from 2015, the release dates started slipping.

Information is the currency of financial markets. South African Reserve Bank’s Prudential Authority (PA) regularly issues its supervisor report by June. The report, for the past two years, covers the banking, insurance and cooperatives sectors as well.

Let’s take statistics more seriously.