In Q3 2023, eight prominent Kenyan banks, including Equity, KCB, and Stanbic, collectively raised their loan-loss provisions by 45.8% to KES 62.5 billion from KES 42.9 billion in Q3 2022. This increase anticipates a surge in defaults amid a challenging operating environment.
Comparing the data, the KES 62.5 billion provision closely mirrors the amount set aside during a similar period in 2020, marked by the COVID-19 pandemic, when borrowers were granted debt repayment holidays, as indicated in financial statements.
Analysis reveals that three of the eight banks—Equity Bank, I&M, and Stanbic—established a record level of insurance cash reserves during this review period, surpassing the provisions made during the Covid-19 pandemic year of KES 14.3 billion, KES 10.5 billion, and KES 2.9 billion, respectively. Loan-loss provisions for the other five banks—Co-operative Bank, NCBA, Absa, Standard Chartered, and KCB—were not as high as in the pandemic period. NCBA and Co-op Bank recorded a drop in loan-loss provisions.
Equity Bank, in particular, increased its provisions by 96.6% to KES 19.0 billion in Q3 2022, impacting its profitability. Stanbic and I&M also saw significant increases of 56.8% and 28.3% to KES 4.5 billion and KES 4.6 billion in Q3 2023 from KES 2.9 billion and KES 3.6 billion in Q3 2022, respectively, in their loan-loss provisions during September.
The Central Bank of Kenya (CBK) mandates banks to set aside funds when principal or interest remains unpaid for 90 days, anticipating potential defaults. Non-performing loans (NPLs), indicating loans not serviced for more than three months, have risen, reflecting a challenging operating environment exacerbated by currency devaluation, high-interest rates, and soaring inflation.
During an investor briefing, James Mwangi, the CEO of Equity Bank, highlighted the strain on consumers, particularly regarding inflation and the cost of commodities. CBK data indicates an increase in the ratio of NPLs to gross loans, reaching 15.0% in August from 14.2% the previous year.
NPLs surged to a record KES 611.4 billion for the eight months up to August, compared to KES 505.0 billion in the same period last year, underscoring the need for increased loan provisions. Experts attribute this trend to the combination of high-interest rates, a weakened shilling, and the impact of new tax measures, reducing disposable income for households and businesses and making loan servicing more challenging.
This move by Kenyan banks to bolster loan-loss provisions echoes similar measures taken in 2020 during the initial wave of the COVID-19 pandemic, emphasizing the ongoing economic challenges and the banking sector’s proactive approach to potential defaults.
