KBA report shows covid effects as banks’ profitability sinks 30.9%

Kenya’s banking sector profit before tax sunk to 30.9% in 2020, a nine-year low on account of higher loan loss provision which surged 47.5% to Kshs. 198.1 billion.
According to State of the Banking Industry Report 2021 by the Kenya Bankers Association, the loan loss provision surged 47.5% in 2020 from Kshs. 134.3 billion registered prior the pandemic, with loan loss accommodations absorbing 45.7% of non-performing loans compared to 40.2% recorded in 2019.
Trade, manufacturing and agriculture accounted for majority of restructured loans last year.
KBA says the industry also recorded lower total income growth which was occasioned by rising operating costs driven by increased expenses on loan loss provisions as banks went ahead to restructure loan book due to customers inability to service their loans.
KBA Chief Executive Officer Dr. Habil Olaka the banking sector has embarked on measures that will enhance business models through leveraging on technology to achieve efficiency.
“Cognizant of market risk, growing competition, increasing sophistication of customer expectations, as well as the dynamism in the regulatory environment, the overarching challenge for the industry is to continue investing resources towards remaining at the frontier while underpinning economic recovery,” said Dr. Olaka.
In the middle of the pandemic, banks registered higher liquidity and capital adequacy ratios as industry’s total capital adequacy ratio rose to 19% in 2020 from 18.8% in 2019, above the statutory minimum requirement of 14.5%, which KBA says was “supported by an increase in the total capital which outpaced the growth in total risk-weighted assets during the period.”
Industry total assets rose 12.4% in 2020 to Kshs. 5.4 trillion compared to Kshs. 4.8 trillion in 2019, driven by a faster expansion in non-loan assets – mainly investments in government securities – which grew by 18.5% as gross loans and advances rose by 6.7%.
Net loans and advances increased by 9.1% in 2020 to close at Kshs. 2.93 trillion from Kshs. 2.63 trillion in 2019.
On the other hand, deposits grew 13.1% to stand at Kshs. 4.11 trillion which outpaced gross loans in the sector during the period.
KBA Research and Policy Director Dr. Samuel Tiriongo said analyses of banks’ tax contribution showed the industry contributed Kshs. 42.4 billion in 2020 down from Kshs. 55.4 billion in 2019, largely reflecting the depressing effects of the pandemic on incomes.
“While this represents a 23.6% drop in the tax contribution, it highlights the extent to which the sector would have contributed more to tax revenue had it not borne most of the weight of supporting other sectors of the economy. In fact, the implicit tax rate of the industry rose to 39.1% in 2020 from 35.7% in 2019,” added Dr. Tiriongo.
The industry’s average Return on Equity scaled down to 13.3% from an average of 21.1% recorded in 2019.
At the close of the year 2020, banks had collectively raised about Ksh 1.7 billion for the COVID-19 Emergency Response Fund, an intervention without which many hospitals and health workers would have been in dire need.
Nonetheless, KBA expects the banking sector to remain robust driven by enterprise and trade sectors.

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