Loan defaults squeeze banks’ Q3 profits on tough economy

High cost of living, low business activities and job losses saw local banks shoulder heavy loan losses in the first nine months of the year, with some opting for more secure investments.

An analysis of top banks’ Q3 financial statements shows they set aside billions of shillings in loan provisions while some like Equity Bank opted to cut on traditional lending.

The second biggest lender in East Africa in terms of assets told investors that it favoured government bonds to traditional lending, pumping Sh468.1 billion in government papers during the period under review, a five per cent growth compared to a similar period in 2023.

Traditional loans to customers, however, dropped by five per cent to Sh800.1 billion compared to Sh845.9 billion in the corresponding period last year.

According to Equity Bank Holdings Group chief executive officer, James Mwangi, the period was characterized by a tough operating environment with inflation and currency devaluation picking up in the earlier months of the year.

This saw the firm adopt sound coping mechanisms including diversified investments and high provision to safeguard against high loan defaults.

“The global operating environment characterised by macro-economic shocks saw the Group continuing with its conservative and prudent defensive approach by booking adequate loan loss provisions amounting to Sh12.7 billion.”

“This resulted in an NPL coverage ratio of 67 per cent with a Non-Per- forming Loans (NPL) ratio of 13.4 per cent, way below the latest published industry average of 16.7 per cent,” Mwangi said.

KCB Group, which recorded, which recorded 45.8 billion in profit after tax for the first nine months of the year, driven by sustained revenue growth suffered the highest impact of loan defaults, with the stock of NPLs hitting Sh215.3 billion.

This saw the NPL ratio close the quarter at 18.5 per cent, reflecting the economic conditions in different sectors across the markets.

“To mitigate the effect of increased NPLs, provisions increased year on year by 12.2 per cent. The Group con- tinues to prioritize efforts to improve asset quality with various measures in place to reduce the NPL ratio both in the short and long-term,’’ the bank said in a statement.

Cooperative Bank Group’s total operating expenses increased by 12.7 per cent to Sh32.7 billion from 29 billion in Q3’2023, driven by a 32.5 per cent increase in loan loss provisions to Sh5.6 billion from Sh4.2 billion recorded in Q3’2023.

The increase in provisioning comes amid the increased credit risk as a result of the deteriorated business environment as evidenced by the average Q3’2024 Purchasing Managers Index (PMI) of 47.8, down from an average of 48.0 in Q3’2023, Absa Bank Kenya, on the other hand, said the elevated interest rates regime pushed up gross non-performing loans 23.5 per cent to Sh42.7 billion.

In response to the increased non-performing loans, the lender edged up its loan loss provisions by 18.7 per cent to Sh8 billion.

Customer loans and advances ended the quarter 5.9 per cent lower at Sh311.5 billion, while customer deposits decreased marginally by 0.7 per cent to Sh351.8 billion.