President Emmerson Mnangagwa has sailed through the impact of Covid-19 and Russia’s invasion of Ukraine. With several months away from Zimbabwe’s ... general election where he will be seeking another term, Mnangagwa is facing a bigger challenge that could further cripple the Zimbabwean ailing economy: a power crisis.
Kenyan banks reported stellar earnings growth for 2021, driven by strong credit growth, M&A and high transaction fees.
But the sector’s underlying performance may be skewed given a significant drop in loan impairment charges in 2021 and subsequent write-backs, which boosted bank balance sheets and results, say some analysts.
“43% of tier one banks net earnings for 2021 were a result of write-backs,” says George Bodo, director at Callstreet Research and Analytics, an investment and market research platform based in Nairobi. While an asset is written off once its value has depreciated, an asset can “written-back” or put back on the balance sheet when its value increases again.
“But if we exclude the write-backs, net earnings were flat year-on-year, so it is difficult to make a judgement on the underlying performance,” he says.
As Adesoji Solanke, director of frontier and SSA Banks and FinTech, at Renaissance Capital says: “There were some write-backs, but these were not meaningful because impairment charges are net figures that already reflect new impairment charges minus write-backs.
“While the banks took sizable impairment charges in 2020 due to the fallout of the global pandemic, the macro environment has improved, and loan restructuring has been mostly successful, which means that banks were able to record significantly lower impairment charges in 2021, which has helped boost earnings growth,” he says.
In 2021, Equity Bank’s impairment charges KSh13bn ($112m) and cost of risk fell to 1% in 2021 compared to 5.8% in 2020. At KCB, impairment charges were KSh5.8bn while cost of risk fell to 1.8% from 4.4% within the same time period.
Two largest banks
For the year end 2021, Equity Bank’s profit after tax nearly doubled, from KSh20.1bn to KSh40.1bn, total assets grew by 29% to KSh1.305tn from KSh1.015tn, customer deposits grew 29% to reach KSh959bn, up from KSh740.8 in 2020, and the bank’s non-performing loan (NPL) ratio dropped from 11% to 8.3% over the course of the year.
The bank recorded a 98% increase in earnings per share, from KSh5.20 to KSh10.40, with a record dividend payout of KSh11.3 billion. The last dividend payout was in 2018.
Equity Bank’s merger with DRC’s Banque Commerciale du Congo (BCDC) in February 2021 has also been a boon for the bank, contributing KSh4bn in net profit for the group.
At KCB, profit after tax grew 74% from KSh19.6bn in 2021 to KSh34.2bn in 2022, total assets grew 15.4% to hit KSh1.139tn and customer deposits grew 9.1% to reach KSh837.1bn. KCB’s NPL ratio rose, however, from 14.7% to 16.5% between 2020 and 2021.
“KCB’s coverage ratio also worsening to 60% from 66% in 2020,” says Solanke. “Some of the bank’s NPL challenges stem from the hospitality and construction sectors. In hospitality, this is due to slower than expected recovery of the tourism sector while in construction, this is partly due to delays in government payments to contractors,” he says.
According to a note published by ratings agency Fitch, earnings recovery will continue into 2022, supported by an improvement in margins after the Central Bank approved of the banks’ own risk-based pricing model in March.
Risk-based pricing will allow lenders to offer different consumers different interest rates loan terms and may lead to an acceleration of higher-yielding credit. Improvements to margins will be much more apparent by 2023, says Solanke.
Nevertheless, “Kenyan banks are not immune from global risks exacerbated by the conflict in Ukraine. These combined with any potential disruption due to Kenya’s August general election, threaten to stall a post-pandemic recovery,” the note says.
“I do not expect any more write-backs in 2022,” says Bodo at Callstreet.
“The Ukraine-Russia conflict means higher inflationary expectations. If you add upcoming general elections into the mix, then I’m looking at inflation crossing double-digit territory. This will mean higher interest rates. For banks, this will trigger narrowing of net margins because of asset re-pricing constraints,” he says.
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