Making It Rain At The NSE – An Overview Of Banking Sector Performance

In late December 2021, Kenyan banks reported record profits and dividends making them one of the best-performing companies on the bourse. To put it into context, the sector recorded Kes.197.6 bn net income with the total issued dividends topping 51.7bn. One might wonder how this is possible owing to the fact that the economic effects of Covid 19 are still being felt across every sector. This issue delves deeper into why this performance has been so impressive that many wonder whether they (banks that posted massive profit declines in the prior period) operate in an economy different from that of the other players.

Even before the pandemic, the world economy had shrunk with large economies experiencing an economic slowdown. With the pandemic, credit was frozen and most loans proved uncollectible. As per IFRS 9, banks had to foresee credit default thereby, passing huge provisions for loan losses. This saw the banks post a net cumulative profit of 107.3bn. As the restrictions eased, customers continued servicing their loans, allowing them to lower these provisions (by as much as 70%). The net effect was increased net income.

Another reason could be attributed to income diversification. Most banks have leveraged on technology to meet the ever-changing customer needs. As such, banks have strived to increase non-interest income. This has seen the income growth over time, becoming an element with a significant impact on their mandate. Also worth noting is that these banks have developed an insatiable appetite for government debt. This has guaranteed a constant stream of income at a time when our government has become a net borrower.

Cost reduction has also played a significant role in boosting profitability. In comparison to 2020, banks cut their operational costs by as much as Kes.42bn. This is seen in the transition to online platforms as well as soft mobile phone loans. Banks have been closing unprofitable branches in a move that has saved lease costs. With mobile and internet penetration growing daily, most branches are set for closure. 

Over the years, the Kenyan market has been the major contributor to the sector’s mandate. With the EAC now connecting the Indian Ocean to the Atlantic Ocean, local banks have been on an expansion spree. This has seen regional entities contributing more revenue and profit. For instance, Equity Bank’s expansion into the DRC has seen to it that one third of the revenues came from one of Africa’s most populous countries where they are ranked second in terms of assets. This growing trend will see the exposure of our locally owned banks reduce as regional entities’ contributions increase

The banking sector has always played a crucial role in the success of any economy and its performance is a good indicator of economic success. Going forward, banks should increase lending to SMEs to guarantee a significant impact on the general economy.

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