The Central Bank of Kenya (CBK) has revealed that the country’s banking sector remains resilient amidst the COVID-19 turmoil despite registering a decline in its pre-tax profits.
In its latest report, the CBK says banks’ pre-tax profits declined by 29.5 percent to record Ksh.112.1 billion for the year ended December 2020 and Ksh.96.4 billion in the first half of 2021.
This as high level of bad debts led to increased total expenses that increased by 32.1 percent to Ksh.318.2 billion in December last year.
The sector’s return on assets and return on equity declined to 2.1 percent and 13.9 percent in December 2020, respectively.
CBK is optimistic that the sector will continue to grow in 2021, due to prospects of containing the COVID-19 pandemic and the rollout of vaccines.
For the sector’s safety, the risk exposure level to the fund increased from 59.7 percent in December 2019, to 81.9 percent in December 2020.
CBK’s report coincides with that of the Kenya Bankers Association (KBA), which indicates that the overall profitability and contributions to the national budget by banks declined to a nine-year low in 2020 after COVID-19 ravaged trade, manufacturing and agriculture sectors where banks have restructured a majority of assets.
KBA’s state of the banking industry report 2021, shows that banks’ profits before tax dropped by 30.9 percent, the lowest level since 2012.
The report attributes the decline to a depressed economic performance and quality of assets held by banks.
“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 KBA CEO Dr.Habil Olaka.
The Kenya Deposit Insurance Corporation (KDIC) implemented risk–based premium at the inset of current fiscal year to reward members proactively investing in and implementing effective risk management frameworks.
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It also continues to implement appropriate resolution frameworks “to ensure that in case of a failure of an institution, the process of resolution is seamless in collaboration with CBK,” said CBK in a report.
Flight to safety concerns are also emerging as banks and customers seek safe assets with positive returns and preservation of value.
At the height of COVID–19 pandemic, banks invested heavily in long–term Treasury bonds, for safety and quality.
Banks are likely to sell bonds to fund increased credit demand, says CBK if the situation normalizes,.
The resultant increase in interest rates would lead to the decline in bond prices held under the available–for–sale, which are subject to mark–to–market valuations. Valuation losses would reduce profitability, and in turn capital levels
The regulator is, however, warning that the growth of the sector will depend on credit risk, operational and governance risks, flight to safety concerns that has seen banks and customers seek safe assets with positive return and preservation of value and Kenya’s political environment ahead of the 2022 general elections.
“Political noise around the 2022 General Elections could impact the economy and in turn pose concerns on banks stability.”
