Kenya: Banking sector H1 earnings analysis

Kenyan banks have faced a challenging business environment in the first half of 2023 as they grapple with rising non-performing loans and increased loan loss provisions. The recent earnings reports of major banks in Kenya have reflected this tough macro-economic environment, with players like KCB and Equity showing less impressive results. The primary reasons behind the lackluster performance of these big banks have been attributed to escalating interest rates, particularly in interest expenses, outpacing interest income growth. This imbalance has resulted in lower operating income for these institutions. Robert Oching, CEO of Abujani Investment, pointed out that interest expenses and loan loss provisions are significant contributors to the underwhelming results of major banks in Kenya. The exposure to non-performing loans from some of the largest corporates in the country has further exacerbated the situation for these banks. However, there have been exceptions to this trend, with banks like Stanbic and NCBA reporting double-digit growth in profitability. Oching suggested that their success could be linked to a lesser exposure to high-risk corporate clients. Another key trend observed in the banking sector is the shift towards asset management services. Banks like NCBA, Standard Chartered Bank, and ABSA have been strengthening their asset management units, which has helped drive their growth. On the other hand, traditional banks, such as Equity, KCB, and Co-op, have faced challenges due to high interest expenses. Enhanced asset management capabilities have enabled some banks to offer customers more diverse investment options beyond fixed deposits, thereby aiding their financial performance. The market has responded differently to the performance of various banks. While KCB's share price has faced a decline following reduced earnings, NCBA has seen an uptick in share value due to improved return on equity. Banks like DTB and INM have reported stable results, reflecting in their steady share prices. The rising interest rates and the tightening monetary policy stance by central banks have raised concerns about credit uptake among consumers. Higher borrowing rates and increased cost of funds for banks are creating a challenging lending environment, potentially leading to higher non-performing loans. Despite inflation rates decreasing slightly, the uncertainty in the monetary policy landscape is adding to the overall market conditions. The issue of non-performing loans has become a significant source of worry for the banking sector. Several large corporates defaulting on loans and the growing trend of placing companies under administration or receivership are adding to the negative sentiments prevailing in the market. The tough business environment has also impacted manufacturing companies, struggling with soaring oil prices and inflation rates. Despite proposals by some MPs to cap interest rates, experts like Oching caution against such measures. The experience of an interest rate cap in 2016 had adverse outcomes, making banks more risk-averse and constraining private sector credit growth. It is essential for stakeholders to acknowledge the prevailing challenges and ensure that policies are crafted to support sustainable credit growth and investment in the market.