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Moody’s forecasts a tough 2020 for banks in the region

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East African banks’ earnings will come under pressure in 2020 owing to increased exposure to bad debts and government borrowings, coupled with uncertainty in the regulatory framework and weaker-than-expected economic growth.

Economists at the global ratings agency Moody’s predict that the profit margins for many lenders in Africa, will be subjected to higher loan-loss provisioning requirements, rising operating costs and subdued business growth opportunities associated with weaker-than-expected economic growth. That will mean less dividend prospects for shareholders and dimmer career prospects for bank workers.

“High NPLs and heavy government exposure poses risks. Provisioning costs will remain high as problem loans rise and changes in regulation, including implementation of IFRS 9 accounting standards, which require provisions to be taken against some performing (but at-risk) loans,” says Moody’s African Banking Outlook (2020) Report released this month.

“Revenue growth will be subdued in the weaker operating environment. Net interest margins, the banks’ main source of revenue, will also likely decline due to lower interest rates. Cost growth is likely to exceed revenue growth as banks spend on IT development, compliance and anti-money laundering processes and as they build distribution networks.”

Non-performing loans (NPLs) ratio is a key financial stability indicator as it affects profits, solvency and liquidity of banks.

Kenyan banks lead their regional peers in terms of accumulation of bad loans, with their proportion of NPLs to gross loans standing at an average of 12 per cent, followed by Tanzania (10 per cent), Rwanda (5.6 per cent) and Uganda (three per cent).


In Rwanda, banks executed write-offs of bad debts estimated at rwf29 billion in January-June of this year, leading to a decline in the NPL ratio to 5.6 from a peak of 8.2 per cent in September 2017, according to the National Bank of Rwanda’s) Monetary and Financial Stability Report dated August 22, 2019.

In Kenya, Moody’s notes that the non-performing loans will remain elevated largely due to the accumulation of payment arrears by the government and financial problems affecting a cross-section of corporates.

“Smaller banks will remain more challenged, facilitating further consolidation,” the report says, adding that Kenya’s bad loans situation could be worsened by the increased uptake of loans following the repeal of the interest rates caps.

“Kenyan banks will maintain strong capital buffers, high liquidity — especially in local currency — and a stable, deposit-based funding structure,” the report says.

In Tanzania, policy uncertainty regarding bank regulation and the mining sector will continue to affect the business climate and foreign investment and will pressure banks’ credit growth, profitability and loan quality.

“Loan quality will be challenged by inefficient problem loan resolution tools, poor credit underwriting, government payment arrears and delayed recognition of some non-performing loans,” projects Moody’s.

In Uganda the report says that bad loans have been declining to 3.4 per cent of the gross loans as at December 31, 2018, but extensive use of dollars where 40 per cent of assets are denominated in foreign currency poses a risk.

“Widespread dollarisation constrains foreign-currency liquidity buffers, especially in view of the central bank’s limited capacity to act as lender of last resort in foreign currency,” the report says.

In Kenya, implementation of the new accounting standards, the International Financial Reporting Standards (IFRS9), interest rates caps and the demonetisation of currency impacted on banks’ performance in 2019.

The Central Bank of Kenya had spared lenders from charging increased loan-loss provisions in their income statements in the first year of the IFRS 9 regime (January 1 to December 31, 2018), a move that saw banks record lower expenses and shore profits.

Starting January this year, implementation of the new accounting standards took effect forcing Kenyan banks to report their losses through their profit and loss statements instead of through the balance sheets as was done before.

“This has led to decreased profitability evidenced by the increase in weighted average loan loss provisions to Ksh2.8 billion ($28 million) in Quarter 3 2019, from Ksh1.8 billion ($18 million) in the same period last year,” according to analysts at Cytonn Investments Ltd.

In Rwanda, banks are expected to increase their capital base in five years in line with the new licensing requirements under the Basel III new capital requirements. Capital requirements for different categories of banks are:  Commercial banks from rwf5 billion ($5.23 million) to rwf20 billion ($21 million), development banks from rwf3 billion ($3.14 million) to rwf50 billion ($52.38 million) and for co-operative and mortgage banks was set at rwf10 billion ($10.47 million).

In Tanzania all undercapitalised banks were directed to come up with plans to restore capital levels by December 2017. In January last year five banks that failed to comply with the new requirement to raise Tsh2 billion ($867,966) were shut down.

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