- Banks' profits up 14% yoy in Jan and private sector credit growth improves to 9.7% yoy in Feb boosted by recovery in Q4
- But NPL ratio increased to 14.5% in February with recent Covid lockdown expected to result in weaker asset quality
- Outlook for Q2 21 now dimmed by latest restrictions in movement, closure of business and strict curfew directives
According to latest data from the Central Bank of Kenya, banks' NPL ratio increased to 14.5% in February 2021 from 14.1% in December 2020, pointing to expected asset quality weakness for our covered banks, which account for over 60% of total industry assets. The key sectors under pressure include real estate, agriculture, personal household and manufacturing. The implementation of the new Covid lockdown measures has already resulted in job losses and negatively impacted revenue for firms such as East Africa Breweries Limited (EABL). While the economy had started to recover in Q4 20, we believe this setback will result in weaker asset quality in Q2 21. We are particularly concerned about the tourism, real estate and education segments, which have been the worst hit from business closures.
Private sector credit growth up by 9.7% yoy, but expect anaemic growth in Q2
The economic recovery momentum in Q4 20 spilled over into Q1 21 driven by the agriculture, real estate and construction and trade segments. Notably, the 9.7%yoy private sector credit growth in Q1 21 was driven by manufacturing, transport and communication and real estate . Although this recovery is encouraging and points to strong asset growth in Q1 21, we believe Q2 21 will experience anaemic asset growth following the new directives on inter-county movement, business closure and tighter curfew. The regulator is, however, optimistic on the overall outlook of the economy with the expectation of a strong rebound on the back of vaccinations and the measures announced by the president to contain further spread of the coronavirus.
Profitability up 14% yoy in January on lower cost of risk and strong credit growth
Banking sector PBT was up 14% yoy in January, according to the Central Bank of Kenya, setting the stage for a strong Q1 21 performance. We believe the positive performance is on the back of lower cost of risk and stronger credit growth. Total assets increased by 13% yoy, although we note that banks were allocating more assets to government securities with overall liquidity at 54.9% in January 2021 from 49.8% in January 2020. Gross loans grew 9% yoy while gross NPLs increased 28% yoy.
Regulator survey reveals cautiously optimistic private sector
Despite the recent lockdown measures, according to surveys carried out in the private sector by the Central Bank of Kenya, businesses are upbeat about the economy on account of Covid-19 vaccine availability in Kenya, increased commodity demand and higher government spending on infrastructure. But concern looms over rise in cost of input and continued uncertainty over the pandemic.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...