The simultaneous release on Thursday morning of half-year results of Kenya’s three largest banks portrays a picture of the banks resuming their super profits streak even as the government looks set to repeal interest rate caps later this year.
But the results are deceptive in that the banks have all shown flat growth in loans, despite the growth in customers deposits which have increasingly been channelled towards funding government debt, at the expense of the private sector.
The results showed:
- Flat growth in loans: e.g while KCB deposits are up by Kshs 40 billion this year, net loans are actually lower than December 2017.
- Decline in assets and capital – as the banks noted that the adjusted capital ratios were due to CBK guidance on IFRS9.
- NPA’s up.
- Growth in the diaspora and the East Africa region.
- KCB is expected to complete the acquisition of Imperial Bank later this year
James Mwangi CEO of Equity spoke of the bank’s total income now being ahead of where they were in June 2016 before the interest rate caps were set by Parliament, and that the June 2018 results were achieved despite losing 40% of loan interest income in Kenya. Interest rate caps which were reintroduced in Kenya in 2016 were pushed at a time when large banks were recording “super profits” and which parliamentarians attributed to them charging high-interest rates to borrowers.
Another factor has been cost efficiency improvements through digitization and a move away from fixed investments in brick and mortar. Equity also reported that 97% of customer transactions were done outside branches and these accounted for 55% of the value of transactions, and their CEO said that in future, branches will be for high-value transactions, advisory services, and cross-selling products.
With the result of the three, along with that of Barclays and Stanbic earlier this month, we have results of five of the seven largest banks in Kenya and none from the smaller banks. Last year,, the top -ten banks took over 90% of the industry profits. What does IFRS9 portend for the smaller banks?
August 2 saw bank closures in Ghana and Tanzania with interesting back stories on the institutions from regulators in both countries.
Tanzania: the regulator Bank of Tanzania (BoT) issued notices that covered two separate cases. BoT took over Bank M, closing it down for three months and appointed a statutory manager (in place of the directors and management of the bank) who will determine the future of the institution. The statement (PDF) read that this was done for reasons that “..Bank M has critical liquidity problems and is unable to meet its maturing obligations. Continuation of the bank’s operations in the current liquidity condition is detrimental to the interests of depositors and poses systemic risk to the stability of the financial system.“. Two years ago, Bank M distanced itself from M Oriental Bank in Kenya.
The Bank of Tanzania also published an update (PDF) on other banks whose licenses it had revoked in January 2018. Of these earlier bank closures, three of them had been given up to 31 July to increase their level of capitalization and as a result, the BoT had approved a decision to merge one of the affected banks – Tanzania Women’s Bank with another bank – TPB which will result in all its customers, employees, assets, and liabilities transferring to TBP Plc . Meanwhile, two of the other banks, Tandahimba Community Bank and Kilimanjaro Cooperative Bank managed to meet the set minimum capital requirements and have been allowed to resume normal banking operations.
Ghana: Meanwhile in Ghana, the regulator Bank of Ghana revoked licenses of five banks – uniBank Ghana, Royal Bank, Beige Bank, Sovereign Bank, and Construction Bank – and appointed a receiver manager to supervise their assets and liabilities as a combined new indigenous bank, called the Consolidated Bank. All deposits at the five banks have been transferred to the new bank and customers will continue banking at their usual branches which will now become branches of Consolidated. Also, all staff of the five banks will become staff of Consolidated, except for the directors and shareholders of the five banks who will “no longer have any roles”
The Bank of Ghana statement reads that .. “to finance the gap between the liabilities and good assets assumed by Consolidated Bank, the Government has issued a bond of up to GH¢ 5.76 billion. ” and goes on to give some details and background of the problems encountered at the former five, leading to the subsequent bank closures:
- uniBank: The Official Administrator appointed in March 2018 has found that the bank is beyond rehabilitation. Altogether, shareholders, related and connected parties of uniBank had taken out an amount of GH¢5.3 billion from the bank, constituting 75% of total assets of the bank. Over 89% of uniBank’s loans and advances book of GH¢3.74 billion as of 31st May 2018 was classified as non-performing, in addition to amounts totaling GH¢3.7 billion given out to shareholders and related parties which were not reported as part of the bank’s loan portfolio. uniBank’s shareholders and related parties have admitted to acquiring several real estate properties in their own names using the funds they took from the bank under questionable circumstances. Promises by these shareholders and related parties to refund monies by mid-July 2018 and legally transfer title to assets acquired back to uniBank have failed to materialize.
- Royal Bank: Its non-performing loans constitute 78.9% of total loans granted, owing to poor credit risk and liquidity risk management controls. A number of the bank’s transactions totaling GH¢161.92 million were entered into with shareholders, related and connected parties, structured to circumvent single obligor limits, conceal related party exposure limits, and overstate the capital position of the bank for the purpose of complying with the capital adequacy requirement.
- Sovereign Bank: Subsequent to its licensing, a substantial amount of the bank’s capital was placed with another financial institution as an investment for the bank. The bank has however not been able to retrieve this amount from the investment firm with which it was placed, and it has emerged that the investments were liquidated by the shareholders and parties related to them. Following enquiries by the Bank of Ghana, the promoters of the bank admitted that they did not pay for the shares they acquired in the bank. The promoters of the bank have since surrendered their shares to the bank, while the directors representing those original shareholders have since resigned. The Bank of Ghana has concluded that Sovereign Bank is insolvent, and that there is no reasonable prospect of a return to viability.
- Beige Bank: Funds purportedly used by the bank’s parent company to recapitalize were sourced from the bank through an affiliate company and in violation with regulatory requirements for bank capital. In particular, an amount of GH¢163.47 million belonging to the bank was placed with one of its affiliate companies (an asset management company) and subsequently transferred to its parent company which in turn purported to reinvest it in the bank as part of the bank’s capital. The placement by the bank with its affiliate company amounted to 86.86% of its net own funds as at end June 2018, thereby breaching the regulatory limit of 10%. Also, the bank has not been able to recover these funds for its operations.
- Construction Bank: the initial minimum paid up capital of the bank provided by its promoter/shareholder, was funded by loans obtained from NIB Bank Limited. An amount of GH¢80 million out of the amounts reported as the bank’s paid-up capital and purportedly placed with NIB and uniBank, remains inaccessible to the bank – and the bank’s inability to inject additional capital to restore its capital adequacy to the minimum capital of GH¢ 120 million required at the date of licensing threatens the safety of depositors’ funds and the stability of the banking system.
Kenyan banks have been given more time to implement increased provisions as part of the capital compliance in new accounting rules IFRS9.
According to KPMG IFRS9 is still effective as at 1 January 2018 for all entities reporting under International Financial Reporting Standards (IFRS), which includes companies in Kenya. However, because IFRS 9 is likely to have a significant negative impact on banks’ capital adequacy ratios, CBK has given banks a 5 year period in this regard to meet the resulting capital requirements from implementation of IFRS 9. In practice, this means that CBK will allow Banks to stagger the effect of the increase in provisions on capital adequacy ratios over 5 years.
Last year, KPMG joined Barclays Kenya in unveiling IFRS 9 by giving the perspective from the auditor’s side on how they were assisting banks to prepare for the change over including reconciling the enormous amounts of data called for by IFRS9 rules and working with banks to develop models including for better management decision-making and provisions.
See the KPMG IFRS page with stories on how “All corporates need to assess the impact of IFRS 9” and “How corporates might be affected” as well as the recently issued guidelines from the Institute of Certified Public Accountants of Kenya (ICPAK) on the requirements of IFRS 9.
Spire Bank shareholders will hold an extraordinary general meeting at the end of November 207 to approve an increase in bank capital that has been eroded by recent losses at the bank.
At the November 27 EGM, shareholders will approve the creation of 100 million new shares, worth Kshs 500 million that will be allocated to Equatorial Commercial Holdings. Kenyan banks are to have a minimum core bank capital of Kshs 1 billion, and as at June 2017, Spire’s capital was down to Kshs 1.6 billion and the bank had a half-year loss of Kshs 307 million coming on the back of a 2016 loss of Kshs 967 million. Spire had Kshs 13 billion assets, Kshs 6.4 billion loans, and Kshs 7.6 billion deposits as at June 2017. But interest income and total income at the half-year was sharply down from that in June 2016 which could point to their performance trend for the end of 2017.
In 2015, Mwalimu SACCO one of the country’s largest credit societies bought out and rebranded the former Equatorial Commercial Bank as Spire. Equatorial had itself been formed from a merger between Southern Credit and Equatorial banks in 2010.
Mwalimu SACCO has Kshs 37 billion in assets and Kshs 3 billion profit in 2016 and has over 70,000 members as owners. This is the second bank capital injection by Mwalimu at Equatorial after another with the buyout. The shares will be allocated among Equatorial Commercial Holdings which owns 98% of Spire bank has shareholders including Mwalimu National Holdings (75%), Yana Towers (10%), A.H. Butt (8%), Yana Investments (6.75%, and who also own 11% of CBA) and N.N. Merali (0%).
Barclays Kenya held a workshop session in Nairobi today to explain about the coming of IFRS9, a set of new accounting standards that will replace IAS 39 on January 1, 2018. which will have a great impact on banks, their capital, customer assessment and ultimately their profits.
Some of the highlights of the day:
- Even as banks are still digesting the impact of interest rate caps, along comes IFRS9.
- All institutions will adopt the impairment standard in 2018.
- One challenge will be on how to report for impairment: Banks will have to do three sets of accounts, one for impairment according to Central Bank of Kenya (CBK) rules, one for the Kenya Revenue Authority to calculate taxes on profit after impairment, and another for Impairment according to IFRS9. This makes compliance a costly affair.
- IFRS9 is data intensive, so auditors will be concerned with the quality of data and reconciling it to bank financial statements. They will have to trust that management is providing the right data to make decisions, and if not, they will engage with the bank board, then the bank regulator (CBK).
- Banks need systems that are able to capture a lot of this customer data and products and come up with impairment models.
- Banks will use predictive analytics, and big data to manage risk in customer lending.
- IFRS9 brings cross-product default, and if a customer defaults on one loan item like a credit card, a bank has to provide for impairment across all products advanced to them
- Expect a change from the current practice of using credit reference more from the negative perspective (a blacklist of borrowers) to a good one (banks will check to see who has been paying on time and offer them better rates)
- Collection strategies will become very important, given the financial impact of IFRS9 for defaults over 30 days and 90 days.
- Kenyan bankers are working to enable customers to get access to their own data and shop for products that will be easy to compare across different banks. This will be an enhancement of the loan calculator that the bankers association rolled out earlier.
- IFRS9 seems to give an incentive for banks to lend shorter duration loans.
IFRS9 gives incentive to shorter loans
- With IFRS9 banks estimate the credit risk of an instrument, at the point of origination – so losses are recognized earlier.
- Previously, under IAS 39. banks only recognized a loss once an event occurred e.g customer does not pay a loan for many months. Now banks will have to expect and estimate some defaults and recognize the loss upfront.
- Under IFRS9, accounting provisions are expected to be higher than the current regulatory provisions.
Financial Statement Changes
- From day one of IFRS9, there will be an impact on retained earnings and a reduction in Tier 1 capital at all banks
- Under IFRS9, letter of credit, financial guarantees, performance guarantees, unused credit cards, non-traded government bonds will also be used to calculate impairment.
- Studies show that IFRS9 running concurrently with IAS 39 can impact on the capital of a bank by between 25 to 100 basis points.
- Are government securities still risk-free for local traders and investors? Not so under IFRS9. But since Kenya has never defaulted on debt so IFRS9, provisioning will be minimal compared to bonds of some other nations
- On 1 Jan 2018, international accounting standard IFRS9 will replace IAS 39.
- Kenyans banks are at a fairly satisfactory stage in terms of getting ready for IFRS9 with Tier I banks, and those with global parentage at an advanced stage compared to local indigenous banks e.g. Barclays has been working on IFRS9 for two years
- ICPAK (Institute of Certified Public Accountants of Kenya) is working on. rules for the consistent and uniform application of the IFRS9 standard and these will be ready by the end of October.
- ICPAK will have other forums to further explain IFRS9 as will the Central Bank.
- CBK will come up with new classification of loans to replace the current measures of normal, watch, sub-standard, loss etc..