Connect with us

Banking & Insurance

Kenyan Banking Sector FY22 Results Summary – Re-pricing to Improve Margins; NPLs to Persist



The banking sector displayed positively throughout the year. Robus’s double-digit performance was reported by all the nine listed banks under our coverage as the lenders weaved through the tougher economic environment evidenced by rising inflation, higher interest expenses, declining bond valuations, and currency challenges.

The strong performance was also reflected in the dividends as all the nine lenders save for Kenya Commercial Bank (KCB) raised their absolute dividends without significantly raising their payout ratios.

KCB’s pay-out dropped significantly (15.8% vs 44.7% in FY19) due to its 85% acquisition of Trust Merchant Bank (TMB) – DRC which impacted its
capital ratios as well as a rise in non-performing loans (NPLs).

We believe the transaction cost came in much higher at KES 25bn from our initially estimated KES 20bn given it was completed towards the tail end of the year, with TMB growing its book value within the period coupled with the Kenya shilling weakening.

Sector loan book growth averaged 17.7% within the year with most lender cutting their forecasts for FY23 which we think could settle around 10%.

We envision that the lenders will have a mad dash for borrowers (digital as well as corporates in the steel and energy sectors) within the region
in a bid to lock in income at high margins amid a potential decline in private-sector credit.

In addition, we expect to see more focus and competition on the digital lending side as various banks ramp up their digital lending as already
witnessed by Co-op Bank, Stanbic, KCB, Equity Bank, and Absa Bank.

During the year, foreign exchange trading income was a major winner for the banks as most lenders posted near doubling in the income line which
considerably supported their bottom line.

This considerably boosted bank’s non-funded line contribution to levels not witnessed in recent memory.

It is key to note that the Competition Authority of Kenya (CAK) has launched a probe into some banks for alleged fixing of foreign
exchange rates with likely fines or convictions if found culpable.

Notably, some weakness began to be witnessed in 4Q22 with most lenders posting upticks in provisions and NPLs alongside declines in fee income.

Further cementing this argument, only Equity Bank, I&M and StanChart recorded quarter-on-quarter (q/q) gains in their 4Q22 profit before tax
(PBT), cumulatively accounting for KES 3.3bn (35.4%) out of the KES 9.3bn rise in overall banking sector 4Q22 quarterly income.

However, as of January 2023, overall banking sector PBT stood at KES 21.4bn (+12.6%y/y) – highest January PBT since 2015 (KES 37.3bn).

Net interest margin (NIMs) growth should be witnessed within the year
as some lenders begin implementation of risk-based pricing lending with
others repricing
loan rates following the hike of the Central Bank Rate (CBR).

_*movement between 3Q22 & FY22_

Being cognizant of the heightened credit risk in light of the elevated sticky inflation, we analyzed non-performing loans; highlighting sectors
that have a high contribution to NPLs, NPL ratios per sector as well as historical Gross NPLs.

The regulator noted that the banking sector NPL ratio worsened to 14.0% in February 2023 from 13.3% in December 2022, though noted that banks
have made adequate provisions.

We reiterate that part of the solution to the NPLs may be in the resolution of government pending bills, contained inflation, currency
stability and overall recapitalization of firms that struggled during the COVID-19 crisis.

At the same time, private sector credit growth dropped to 11.7% from 12.7% in December denoting the impact of the interest rate hikes by the Central Bank, with potential borrowers more cautious about their borrowing amid higher interest rates.

Liquidity remained sufficient though it progressively declined from 56.7% in January 2022 to 50.7% in January 2023 – lowest since July 2020

Key happenings within the year included a 50% overall reduction in fees charged on the Fuliza product (partnership between Safaricom, KCB and NCBA), a credit repair framework in which 50% of non-performing digital loans which had tenures of 30 days or less would be forgiven (expires on 31st May 2023), IFC became the second largest shareholder in Equity Group, announcement of reinstatement of bank <-> mobile charges at discounted rates of up to 61% on bank to M-Pesa charges (I&M has waived these charges).

We have upgraded our recommendation on Equity Bank and I&M Bank from a HOLD to a BUY in light of declining MTM losses, robust loan book and non-funded income outlook, risk-based pricing implementation and a price decline already witnessed, and on attractive trading multiples and
improving metrics respectively.

Key to note, lenders will by June shift their loans, deposits, and borrowing contracts which are pegged to the LIBOR (London Interbank
Offered Rate) to SOFR (Secured Overnight Financing Rate) which is considered more accurate and secure. In addition, banks will be required to comply with much stricter IFRS 9 capital ratios following the expiry of the 5-year CBK allowance in which they could add back loan loss provisions to capital.

By the Standard Investment Bank Research team

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

What we are about.

Discover Dynamic News Coverage on is your go-to news platform for comprehensive insights into the movers and shakers shaping East Africa's landscape.

As a leading platform in the region, takes a hands-on approach to journalism, ensuring meticulous examination and extensive coverage of key players.

At, we prioritize the core principle of journalism: delivering the truth to our audience. With our unwavering dedication to quality journalism,

the brand is committed to global excellence, constantly adapting to the dynamic nature of the news cycle.

BusinessWorld is published by DEADLINE COMMUNICATIONS LTD.

Copyright © 2024.