Irony of rich banks in an ailing economy

If you had Sh1,000 in August last year and used it to buy 30.3 Equity Bank shares, your stake in the lender would be worth Sh1,626 today — having grown 62.6 per cent.

You would also be on your way to sharing the more than Sh10 billion dividends expected to be distributed to the bank’s owners at the end of the year.

If you put the same amount in an Equity Bank account, the money would have earned you near zero returns, underlining the growing gap between the real economy and the financial markets that will see billions in profits flow into the pockets of shareholders as the rest of the economy dithers.

Bankers are set to reward CEOs and shareholders billions of shillings in bonuses and dividends for doubling profits — a miraculous feat given the tough economic environment.

Whereas loans to the private sector credit have been subpar, about 7.1 per cent in May, and bank rewards to depositors are also at the lowest level, with savings rate standing at 2.5 per cent, banks have posted supernormal profits, led by Equity Bank with a record Sh17.9 billion.

Equity Bank made more money in six months than it earned in three quarters of last year while KCB Bank Group more than doubled its net profits to Sh15.3 billion — setting stage for a better performance in 2021 and promising a huge payout to investors.

A closer look at the leading banks half year financials shows the spike in lenders profits is being driven by reduced costs rather than more lending, especially the cost of insurance for bad loans.

Stellar performance

KCB Group profits came from reduced expenses, especially accounting for bad debts where it cut provisioning from Sh11 billion set aside last year to Sh6.5 billion in June 2021, allowing the lender to plough back the profits.

Equity Group cut back loan loss provision from Sh8 billion to Sh2.9 billion, saying customers resumed payments of loans frozen at the height of the Covid-19 pandemic allowing them to claw back provisions.

On the contrary, Co-operative Bank, which increased loan loss provision by Sh2.2 billion, saw a modest 2.3 per cent rise in net profit to Sh7.4 billion in the six months ended June. 

“The names with outsized profits have lowered their provisioning levels and we have also seen a rebound in net interest and non-funded income streams— reflective of the improved operating environment compared to a similar period last year. These factors combined have spurred the stellar performance reported,” Churchill Ogutu, head of research at Genghis Capital, said.

“There are pockets of concern in the real economy, and as such the growth reported by banks cannot be extrapolated to the real economy. Also, banks have wiggle room to adopt a cautious stance (and jerk up lending to the government) and still get decent returns,” he said.

Analysts say this outsized growth may be a one-off, mainly as the comparable period last year was negatively impacted by the heightened concerns around Covid-19. 

Strategy for growth

Banks had taken a conservative approach last year and set aside billions, with loan loss provisions rising 45.8 per cent, as the lenders sought to cover themselves against the deteriorated asset quality during the year.  

Now with the huge war chest to back up bad loans, the lenders have cleared their legacy problems and can now gather in more profits from increased lending while pursuing defaulters.

KCB said a huge chunk of its Sh95.7 billion, non-performing loan that grew from Sh83.9 billion in the same period last year, occurred during the second half 2020— highlighting the strain on customers and their business because of the healthcare crisis.

Equity Bank said out of the Sh171 billion restructured during the outbreak of the pandemic, Sh103 billion is being paid in time, Sh64 billion is under watch and Sh4 billion has become non-performing.

Going forward, however, lenders will need to find a strategy for growth that may force them to lend back to the economy.

Banks are hoping that they can resume lending on the confidence of public and private credit guarantee schemes for small businesses and that increased enforcement of loan recovery will bring back value from their huge non-performing loan portfolio.

Many businesses have been placed under administration or are being liquidated by lenders— including Kaluworks Limited, biscuit manufacturers Britania Foods, Nakumatt and Tuskys—  while property auctions have spiked.

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