The high cost of living due to weak currency and shakeups in the global supply chain saw banks suffer an additional Sh150 billion in bad loans in 2023, pushing the total to Sh651.8 billion.
The Banking Supervision Report by the Central Bank released Thursday shows the deterioration in banks' asset quality was the highest in the past five years and almost 30 percent compared to the previous year.
The gross non-performing loans for 2022 were Sh503.2 billion.
Nonperforming loans were concentrated mainly in the Trade, Manufacturing, Real Estate, and Personal and Household sectors, with the four sectors accounting for 72.9 percent of total loan defaults.
Traders were the main defaulters, attributed to a volatile business environment that saw them procure a dollar for over Sh160, pushing up import costs.
The sector accounted for 21 percent of all bad loans during the review period valued at Sh137 billion, followed by manufacturing at 20.7 percent or Sh135.6 billion in total value.
Turbulence in the real estate saw the sector's contribution to the country's Gross Domestic Product (GDP) drop significantly by 38 percent leading to Sh111.5 billion in loan arrears.
Personal and household consisting of 12,146,217 loan accounts reported Sh92 billion in loan defaults, accounting for 14.1 percent of the banking sector's gross non-performing loans.
The regulator says it is concerned by the sharp rise in bad loans and is working closely with lenders to mitigate the crisis.
"CBK will closely monitor the four economic sectors to ensure that commercial banks make adequate provisions to mitigate the risk of default,'' the report reads.
The loans and advances in the normal, watch, Substandard, Doubtful, and Loss categories increased by 13.3 percent,11.0 percent, 58.5 percent, nine percent and 60.3 percent respectively.
Normal are loans that perform by the contractual terms and are up to date on repayments and are expected to continue in this condition. Watch on the other hand are loans that are generally past due by between 30 days and 90 days.
Substandard loans are generally past due for more than 90 days but less than 180 days while doubtful loans are generally past due for more than 180 days but less than 360 days.
Loss loans are those that are past due for 360 days or more.
The normal category accounted for 72.5 percent of the total loans in 2023, compared to 73.8 percent in 2022 whereas, the watch category accounted for 12 percent of the total loans in 2023, compared to 12.1 percent in 2022.
The substandard, doubtful and loss categories accounted for 3.3 percent, 7.8 percent, and 4.5 percent of the loan book in 2023, compared to 2.9 percent, 8.1 percent, and 3.2 percent in 2022.
During the year, banks increased the number of loan advances from 3.6 trillion to Sh4.o8 trillion.
Asset quality, which is measured by the ratio of gross NPLs to gross loans deteriorated with the gross NPLs to gross loans ratio increasing to 15.6 percent in December 2023 from 13.9 percent in December 2022.
The Core Capital to Total Risk-Weighted Assets ratio decreased slightly from 16.1 percent in 2022 to 15.4 percent in 2023.
The Total Capital to Total RiskWeighted Assets ratio decreased from 19 percent in 2022 to 18.6 percent in 2023.
The core capital to total deposits ratio also decreased slightly to 16 percent during the review period compared to 17.2 percent in 2022.
"The Kenyan banking industry was therefore fully compliant with the capital adequacy ratios in 2023."
The average liquidity ratio as of December 2023, stood at 51 percent compared to 50.8 percent registered in December 2022.
The slight increase in the liquidity ratio is mainly attributed to a higher growth in total liquid assets as compared to the growth in short-term liabilities.
The banking sector registered a decrease in profitability in 2023 with profit before tax decreasing by 8.8 percent to Sh219.2 billion from Sh240.4 billion in 2022.
The decrease in profitability was attributed to a higher increase in total expenses (Sh175.3 billion) compared to the increase in total income (Sh154.1 billion).
Total income for the banking sector increased by 20.7 percent to Sh899.3 billion in December 2023 from Ksh.744.8 billion in December 2022.
The increase in income was largely attributed to an increase in interest on placement (166.3 percent), interest on advances (29.7 percent), other fees and commission income (22.9 percent) and interest on government securities (11.5 percent).
The banking sector assets in the country also grew by over Sh1 trillion to Sh7.7 trillion from Sh6.6 trillion the previous financial year.