Top Kenyan banks with regional operations, have posted flat, slowed or declined profits in the first quarter of this year, reversing the growth momentum seen recently.
Loan quality — measured by gross non-performing loans (NPLs) to gross loans ratio — weakened to 17.4 percent, from 15.7 percent, in the same period last year, reflecting a surge in bad loans, which prompted banks to adopt tight credit risk appraisal.
According to the Central Bank of Kenya, in its quarterly credit survey, most lenders are willing to keep more of their liquid assets in risk-free government securities in the second quarter (April-June). This, they think, will minimise the threat of bad loans triggered by borrowers struggling to repay in a floundering economy.
Interest income from loans and advances to customers, the lenders’ key revenue source, has been a major casualty, potentially reflecting subdued demand for loans, compounded with declining non-funded income from banking transactions, an indicator of weakening economic activities.
Kenya Bankers Association (KBA) says the reduced profitability for lenders is a reflection of near-zero credit growth and reduced banking transactions as a result of slowed economic activity.”The slowed growth in profitability is really a reflection of near zero growth in credit. This mirrors the sharp rise in interest rates aligned to the CBR hikes effected over the period,” said Samuel Tiriongo, director of research and policy at KBA.“As a result, demand for credit dipped. With the beginning of interest rate cuts, credit growth is expected to recover from Q2 and beyond. These trends are typical of business cycles.”
This includes a slowdown in economic activities that eroded the lenders’ non-funded income through reduction in fees and commissions on banking transactions and reduction in income associated with forex trading.“Despite the rate cuts, loan uptake has remained subdued, with some institutions adopting a more cautious lending approach resulting in a modest contraction of their loan books.“In addition, foreign exchange trading income has declined across most banks, negatively impacting non-funded income,” says Ngugi Waweru, an investment analyst in the corporate finance division at Faida Investment Bank.
Government securities, he said, had also returned declined interest earnings as there have been generally lower yields.
On the other hand, interest expenses have either remained flat or decreased, largely due to reduced interbank deposits or lower interest payouts on customer deposits as this segment has shown limited growth or contraction.“This reduction in expenses has helped cushion the impact of sluggish interest income,” Mr Waweru said.
A review of the unaudited financial statements of top lenders for the three months period to March reveals profit numbers that have either declined, remained flat or grown at a slower rate.
For instance, KCB Groups’ net profit) grew marginally by 0.3 percent to Ksh16.53 billion ($128.13 million), Co-operative Bank Group’s net profit grew by 4.54 percent to Ksh6.9 billion ($53.48 million), Equity Group’s net profit declined four percent to Ksh15.34 billion ($118.91 million).“The environment is expected to be even tougher this year with all the headwinds streaming from global trade tariff wars to shifting geopolitics in the East region,” KCB Group’s Chairman Joseph Kinyua told an investor briefing in Nairobi.
Absa Bank Kenya posted a four percent growth in net profit to Ksh6.17 billion ($47.82 million) while DTB Kenya net profit increased by 9.9 percent to Ksh 3.2 billion ($24.8 million).
Stanbic Bank Kenya posted a 16.6 percent drop in net profit to Ksh3.3 billion ($25.58 million), owing to a contraction in non-interest income, while Standard Chartered Bank Kenya reported a 13.5 percent drop in net profit to Ksh4.8 billion ($37.2 million) due to a shrink in its loan book and decline in forex income.
The surge in the volume of non-performing loans (NPLs) mirrors the financial distress that households and businesses are facing as government seeks to raise revenues through multiple taxation measures to pay debts and finance operations.“Loan growth has largely been muted as banks assess the ongoing macro conditions. Non-performing loans (NPLs) have hit a record high. Other banks have slowed down on loan provisions, likely pointing to enhanced recovery efforts,” said Melodie Gatuguta, a research associate (Banking) at Standard Investment Bank.
Francis Mwangi, CEO of Kestrel Capital, said volatility in forex trading and tightening spreads as lending rates ease faster than deposit rates and lower yields on government securities impacted banks’ earnings.“Two main reasons: FX volatility in 1Q25 has been significantly less than in 1Q24 when the Ksh touched 160 against the USD. Tightening spreads as lending rates ease faster than deposit rates and lower rates on new investments in government papers,” Mr Mwangi said.
If the performance of the lenders in the first quarter of this year is anything to go by, then the bank shareholders might not smile at the end of the year.“The Q1 performance is a reflection of volatilities in the macroeconomic climate. My conviction is that this environment will sustain for the year, even as monetary policy pushes for lower lending rates, structurally the credit risk weighting is not following the same trend” said Dan Owuor, an independent financial analyst based in Nairobi.“Tax policy uncertainty going forward and the clarity on government pending bills are likely putting their thumbs on the scale.”Across the borders, Tanzania’s two biggest banks, CRDB Bank Plc and NMB Bank Plc, posted double-digit growth in net earnings in the three months to March this year in a politically charged operating environment as the country gears for a general election in October.
CRDB Bank Plc’s net profit increased 36 percent to Tsh173.41 billion ($64.46 million) while its net interest income declined to Tsh428.6 billion from Tsh344 billion in the same period last year.
NMB Bank Plc posted a 15 percent growth in net profit to Tsh184.14 billion ($68.45 million) from Tsh160.36 billion ($59.61 million).
In Uganda, private sector credit growth slowed to 7.8 percent in the three months to January from 8.2 percent in the three months to October 2024 reflecting the impact of increased government borrowing, which constrained private sector access to credit, according to the Bank of Uganda.“Lending rates are expected to stay high, with the balance of risks leaning toward an increase due to upside risk factors such as persistent tight liquidity conditions and higher net domestic financing. However, competition from alternative financing sources, like the parish development model, and a potential loosening of monetary policy could exert downward pressure on rates,” the central bank said.
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