By Ronak Gadhia
NAIROBI, Kenya, Dec 29 – Over the last five to six years, multinational banks operating in Kenya have shown a comparatively less aggressive stance in expanding their loan portfolios compared to the local banks.
Financial institutions Stanchart, Stanbic, and ABSA adopted a more cautious approach in lending, while their locally-owned peers, such as Equity Bank, NCBA, KCB, and Co-op, have been proactive in selling loans.
In 2023, the contrasting strategies adopted by multinational and local banks have become evident as interest rates experienced a sharp increase.
The depreciation of the Kenya shilling to record levels against the dollar, coupled with a significant rise in inflation driven by higher food and fuel prices, has had an impact.
These economic factors have put pressure on borrowers, resulting in loan defaults and delinquencies, as some struggled to meet their monthly loan repayment obligations. Consequently, banks have had to contend with an increase in loan defaults.
However, the scenario regarding the loan defaults has been quite different. The non-performing loan (NPLs) portfolios, which consist of loans where borrowers have failed to make monthly principal and interest payments for six months, have not increased as rapidly for multinational banks such as Stanchart, ABSA, and Stanbic when compared to local banks like Equity, KCB, and Co-op Bank.
For example, Equity Bank’s NPLs for its Kenyan operations experienced a significant increase from Ksh42 billion at the end of September 2022 to Ksh92 billion a year later in September 2023. In contrast, Stanchart’s NPLs stood at Ksh24 billion in September 2022 and only experienced a slight decrease to Ksh23.5 billion in September 2023.
This further clarifies why local banks like Equity, KCB Bank, and Co-op Bank had higher loan loss provisions by the end of the third quarter in 2023. Loan loss provisions are expenses that banks include in their profit and loss accounts to account for loans that are unlikely to be fully recovered.
The increase in loan loss provisions resulted in higher operating expenses for local banks compared to their multinational bank peers. Moreover, local banks incurred additional one-time costs.
For example, KCB had expenses associated with NBK and investments in IT infrastructure in Rwanda, while NBK faced redundancy-related expenses. These factors contributed to a significant rise in operating costs for local banks, with some reporting an increase of 40 percent.
As we enter 2024, local banks will focus on reducing operating expenses and encouraging customers to repay their loans to avoid defaults, especially with the Central Bank increasing its benchmark rate, the Central Bank Rate, to 12.5 percent in early December. Both local and multinational banks will adjust their loan prices to account for the CBK rate increase.
One common trend among both multinational and local banks was substantial growth in fee income during the nine-month period from January 2023 to September 2023. This growth was driven by the resumption of fees for mobile wallet to bank account transactions, which were temporarily suspended during the Covid-19 era and reinstated at the beginning of 2023. The digital channel, including mobile banking and lending, also played a crucial role in the banks’ success.
Additionally, both local and multinational banks benefited from the depreciating shilling, with the Kenyan shilling reaching over Ksh150 to the dollar in 2023.
Trading income for most banks, excluding NCBA, continued to grow in 2023 compared to 2022. By late November and early December 2023, banks were earning spreads of 3 to 4 shillings above the central bank rate, which is significant considering the increasing transaction volumes.
The writer is Director of Sub Saharan Banks at EFG Hermes
