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?
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.
Kenya’s economy is projected to grow by 5.6% from 4.7% last year, Stanbic Bank economists projected on Thursday. The Kenya macroeconomy was supported by improved performance in the agricultural and tourism sectors rippling down to the manufacturing and services sectors.
Pic from KenyanWallStreet
Jibran Qureishi, Stanbic’s Regional East African economist explained the Stanbic Bank Kenya Purchasing Managers Index (PMI) served as a leading indicator as it vindicated itself over the quarterly GDP growth rate. He underlined the importance of the government’s focus on credit growth to the private sector, improved agricultural policies, the balance of payments and exchange rate.
Recent ranking in the ease of doing business report, end of the political impasse, improved efficiencies in ports and expected increase in foreign direct investment (FDI) would hopefully promote the economy over the 6% year on year growth target which Kenya has only achieved five times since 1980.
However, Kenya’s debt service costs which are mainly external and fiscal consolidation needs to be thought about more carefully for a better and consistent economic performance and Mr. Qureishi warned that the biggest downside risk to the growth outlook would be slower private sector credit growth and fiscal consolidation. He stated that the introduction of IFRS 9 (replacing the IASB 39) will make the credit growth drought recovery sluggish although the demand side for credit is improving and that the government also needs to develop a sound industrial policy which would have productivity gains rather than increasing expenditure on new infrastructure projects.
- Inflation is likely to fall in H1.18 and thereafter edge higher as 2017.
- Short rains have been good.
- An expected rebound in the agriculture sector.
- KES to be steady in H1.18.
- GDP growth is likely to recover in the near to medium term.
Here’s a recap of other recently-released economic forecast reports on Kenya.
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..