This strong performance in the banks’ profitability proves their resilience and ability to stay through harsh economic conditions that is characterised by high inflation and interest rates.
In the last year the industry’s pre-tax profits stood at KSh. 89.5 billion.
Analysts have said that the increase in profits could be due to increase in lending during the second half of the year, high interest rate, and improved performance by regional subsidiaries.
Mwenda Rarama, a Research Analyst at Kingdom Securities said that the cut in rates during the second half has permitted credit growth and it is hoped to accelerate, and the subsidiaries are performing quite well.
The bankers’ performance was affected by high interest rates demanded by depositors and the slow movement of loans due to the high cost of borrowings for most of the year.
The decision of the Central Bank to reduce interest rates after the stabilising of the shilling and the inflation rate has given the banks an opportunity to lend at a faster rate. In the period between September and October, banks have lent out KSh. 20 billion with the total advances standing at KSh. 1.34 trillion.
But, the growth in advances was accompanied by an increase in defaults as the gross non-performing loans touched KSh. 62 billion which rose from KSh. 60.7 billion at the end of September.
Deposits with the banks rose to Sh1.73 trillion.
Vimal Parmar, head of research at Kestrel Capital said that the Central Bank of Kenya has been lowering its policy rate and banks are following suit, but some companies are holding back because of the upcoming elections.
But, the banks gained from the volatility of the shilling in the second half of 2011 which indicated that the full year performance may not grow so rapidly.
Banks were accused of reporting abnormal profit growth while jeopardising growth of other segments of the economy. Thirteen listed firms have already issued profit warnings this year with high financing costs being one of the leading problems.
Dr. Samuel Nyandemo, lecturer in economics at the University of Nairobi said that this may not go well with other investors who were of the opinion that the cost of loans in the country was too high. It is for this reason that the Donde Bill was being welcomed as the banks would have a monopoly of managing their interest rates.
There was a huge outcry during the high interest period during which MPs had made attempts to regulate the sector arguing that it was making huge profits at the expense of the borrowers. One of the notable features during the period was that the bankers enjoyed higher margins since they had increased lending rates at a faster rate than deposit rates.
Bankers have debated the point stating that the banking business is capital-intensive and the shareholders have to get their just reward. Bank shareholders have been confident about the banks’ performance by pushing in additional capital to fund growth plans and abide by regulatory requirements.
Though the industry has made substantial profits some banks are being weighed down by high deposit expenses. Ecobank Kenya, UBA Bank, and Equatorial Bank have been making losses for nine months till September, with Ecobank recording a whopping KSh. 900 million in losses. National Bank and some of the smaller banks have recorded a drop in profits, but the performance of the large and mid-tier banks helped the industry.
KCB’s net profit grew up by 45.6 per cent to reach KSh. 9.3 billion for the period till September while Equity Bank’s earnings rose by 13.8 per cent to touch KSh.
8.3 billion. StanChart’s net profit went up by 66.3 per cent to KSh. 6.4 billion, Barclay’s recorded 2.2 per cent growth to KSh. 6.2 billion, and Co-operative Bank went up by 23.2 per cent to stand at KSh. 5.9 billion. This indicates that the five large banks contributed more than half of the industry total as at the third quarter.
Citibank analysts were concerned that the industry could be exaggerating its profits as its performance was not in accordance with the macro-economic environment.
Other questions raised by the analysts were on the sufficiency of the amounts set aside as provision for bad loans and how the banks were treating their government securities.
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