Banks in the region are faced with a delicate balancing act of paying dividends to shareholders and preserving capital to withstand the economic shocks occasioned by the Covid-19 pandemic.
Regional central banks have advised lenders to maintain adequate capital buffers to remain resilient through the coronavirus crisis.
The Kenya Bankers Association (KBA) said banks are facing a drop in their capital buffers as they make provisions for loan impairments to cushion loan defaults.
“There is a high likelihood of the banks’ portfolio deteriorating during this time of the Covid-19 pandemic because a number of borrowers are facing challenges and they are more likely not to meet their loan repayment terms. So if the portfolio deteriorates, the prudential guidelines require that you book the necessary provisions that will shrink your capital base,” Habil Olaka, the KBA chief executive told The EastAfrican in an interview last week.
Kenya’s banking industry is facing a potential drop in profitability for the year ended December 31, 2020.
Six banks — Standard Chartered Bank Kenya, Absa Bank, I&M Bank, Diamond Trust Bank (DTB), NCBA and Co-operative Bank — have issued profit warning that their earnings would fall by more than 25 per cent compared with 2019.
The Bank of Uganda (BoU) said the payment of dividends and other discretionary distributions for the year 2020 by the supervised financial institutions will be subject to their conducting satisfactory internal capital adequacy assessments that demonstrate resilience to potential shocks, and risks in their operational environment.
In its Quarterly Financial Stability Review dated December 2020, BoU said the banking industry’s net profit for the year 2020 declined by four per cent to Ush844.3 billion ($229.44 million) from Ush883.4 billion ($240.07 million) in 2019.
According to the macro stress tests conducted by BoU most SFIs have adequate capital to absorb losses from deterioration of all past due to restructured loans.
“Nevertheless, banks’ resilience will be tested in the next six months (January-June 2021) if past due restructured loans and loans under second restructuring continue rising materially,” said BoU.
The National Bank of Rwanda (NBR) said there was a decision to defer dividends distribution for 2019.
“The undistributed 2019 dividends helped to maintain sufficient capital and liquidity buffers,” NBR said through its Monetary Policy and financial stability statement dated February 2021.
According to the NBR, non-performing loans are expected to increase this year.
The Bank of Tanzania said it continues to strengthen risk management in the financial sector by implementing policies and regulatory reforms, including directing banks to implement capital restoration plans and adhering to the regulatory requirements.
“The banking sector performance was generally satisfactory. It remained stable, resilient, adequately capitalized and profitable, with a satisfactory level of liquidity,” according to BoT’s Monetary Policy statement dated February 2021.