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.
"The IFRS 9 replaces the existing IAS 39" Jeremy Awori , MD Barclays pic.twitter.com/R8ICCfG3o6
— Barclays Bank Kenya (@Barclays_Kenya) September 25, 2017
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.
- 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..
In a press conference this week the Central Bank of Kenya (CBK) governor spoke about non-performing assets i.e bad debts and highlighted manufacturing, real estate and, trade sectors.
This comes after the half-year 2017 bankers credit survey released by the CBK noted that the ratio of gross non-performing loans to gross loans increased from 9.5 percent in March 2017 to 9.91 percent in June 2017. The increase in the gross non-performing loans was mainly attributable to a challenging business environment
- Non-Performing Loans: Generally, the commercial banks expect an increase in the levels of NPLs in the third quarter of 2017 with 42 percent of the respondents indicating so. This expected rise in NPLs is attributed to the industry’s perception of increased political risk in light of the upcoming general elections.
- Credit Recovery Efforts: The banks expect to tighten their credit recovery efforts in eight out of the eleven sectors.
The Governor said that in manufacturing, the bulk of the Kshs 5 billion of bad debts increase could be attributed to a sugar company, two cement companies, and a plastics firm, while In real estate, Kshs 3.9 billion was due to two projects – one a golf course, and the other was a housing one. But he added that, for all of these projects, the banks that had financed them were working to resolve the loan performance.
On trade, he said that Kshs 2.8 billion increase of bad debt loans was spread across many banks and that a lot of it relates to delayed payments by government – both national and county ones – to suppliers.
- Less traditional banking: there has been a decline in assets as more banks have turned to digitization to cut costs, and increase efficiency. At Equity, deposits were flat between March and June, which also marked the third straight quarter of overall loan declines
Lower interest income: e.g. 45% down at Family Bank, plunging it to a half-year loss
- A buildup of government debt: Equity now has Kshs 105 billion, KCB 100 billion, and Diamond Trust 83 billion.
- More closure of branches e.g. Barclays, Standard Chartered, Bank of Africa and Ecobank. But it’s not all gloom as some banks like Cooperative and Diamond Trust have announced plans to open new branches.
- Job cuts have been announced at KCB, Standard Chartered, Barclays, Family Bank, National Bank of Kenya, NIC Bank, Ecobank, Bank of Africa, First Community Bank and Sidian Bank.
- With nowhere to go, banks are giving money back to shareholders. Some banks have reduced capital, while KCB with profit flat at the half-year will pay a rare interim dividend confirming analysts’ view that some banks will return more capital to shareholders at a time when they have curtailed lending to riskier customers.
- Big banks are okay, small ones, not so much:
.The banking industry has become skewed. The Top 10 banks share 92% of profits. The small banks share 8%. James Mwangi – #EquityH1Results
— jgmbugua (@jgmbugua) August 22, 2017
- Losses, not profits. E.g. Family and Sidian, went into the red at the half year, despite layoffs and closures, while Ecobank managed to stay above water. These have mainly been attributed to reduced interest income.
- Declines in loans and deposits at tier ii banks, and T1 equity
- Mortgage declines: Buy Rent Kenya said that there has been a major drop in the number of mortgage applications over the past year and that those that the cap was meant for are currently the biggest losers as banks are skeptical to give credit to most individuals as they now have numerous terms and conditions that are not easy to meet.
- Local banks converting debt to equity at Kenya Airways: This has been a reluctant move, with three banks delaying the Ksh 23 billion conversion that will see a consortium of Kenyan banks become the second largest shareholder at the airline.
- Equity announced they will no longer lend unsecured loans to salaried Kenyans, cutting off a product feature that has brought them great popularity.
- New business lines: Banks have looked to other sources of income this year. Co-operative Bank which has net interest income and pre-tax profit that was down 10% in the half-year, received regulatory approval from the Central Bank of Kenya to enter into a joint venture with Super Group, a leading South African leasing company and together they will target major infrastructure projects, government vehicle leasing, oil & gas exploration, and other leasing opportunities. Elsewhere, National Bank entered a partnership with World Remit to allow remittances to be paid directly into bank accounts at NBK, Barclays is funding solar mini-grids in Turkana while Standard Chartered bucked the trend on Equity and will step up unsecured lending.
- Non performing loans (NPA’s) are up: At NBK, they are up to 29 billion, half the 57 billion loan book. NBK is awaiting a Kshs 2.9 billion NSSF (shareholder) loan to shore up capital.
- NPA’s have also gone along with increased provisions e.g. 1.8 billion at Stanbic at the half-year.
Moody’s 4th annual East Africa investor summit Kenya, held in association with Rich Management, looked at East Africa’s resilience in Sub-Saharan Africa’s low growth environment.
- Kenya and Nigeria summit audience think political risks are main challenge to credit in emerging markets. Dubai summit ones are watching USA (policies under Trump and China (economic slowdown) events
- Between 2007-15, 6 of 10 fastest growing African economies were commodity exporters, but for 2016-18, 5 of fastest growing ones are in East Africa. While Sub-Saharan Africa growth is at a 20-year low, East Africa is attractive as their growth is not about commodities.
- Kenya’s economy growing due to infrastructure, FDI, population but banks not benefiting, partly due to the interest rate cap.
- Investors in Kenya want to see a benign August 8 election with a first round winner and a gracious loser.
Bank’s and interest rate:
- Banks face a dilemma – on whether to lend to companies in the Kenya economy or to the Kenya government (where they can earn 10% per year short-term, or 14% in the long-term).
- There was already a slowdown in bank lending (due to regulation and NPA’s) before the interest rate caps.
- The Cost of borrowing in Kenya was too high; and even after interest rate caps, large banks are still getting good 20% returns on equity.
- Some firms are opportunistically raising debt – locking in cheap funding ahead of the election e.g. East African Breweries announced they would build a brewery at Kisumu even as they are yet to agree on the financing. But the problems at Nakumatt are probably due to the drying up of their credit lines as banks feel 14% lending does not compensate their risk.
- At Moody’s, they rate three large Kenya banks – Coop Bank, Equity Bank and KCB Group all equally. Equity has 55% SME exposure and KCB is big in property, while Coop is well-balanced between business and consumer lending – but they have all taken steps to mitigate risks from the interest rate cap law.
Africa Debt markets
- While Moody’s recently upgraded Senegal and Ivory Coast and stabilized Ghana, 8 of 19 Sub-Saharan Africa economics are still rated negative.
- South Africa preempts state corporation defaults through bailouts – e.g. at Eskom, SAA – but this doesn’t inspire business confidence.
- East Africa economies have solid reserves (4-5 months of imports) but key risks are fiscal deficits and debt accumulation (50% debt to GDP is a warning point).
- One of the best performing Eurobonds in Mozambique defaulted.. a flood of money can ignore fundamentals
- Kenya has a history of debt going back over the last ten years.. it knows how to live with the debt. Currently 15 to 17% of Kenya’s income goes to pay debt – (Moody’s get data from government budgets or IMF)
- The London Stock Exchange, and some European ones, are considering issuing some debt in Kenya shillings.
- Kenya can do better in terms of exports & revenue e.g. by improving productivity – the government explained this to the IMF.