The local banking industry remains sound and stable despite being buffeted by the effects of Coronavirus (Covid-19) pandemic, a new report shows.

Kenya Bankers Association’s (KBA) State of the Banking Industry (SBI) Report 2021 indicates that assets and revenues defied the virus to grow by 12 and 7 per cent respectively though profitability dropped 30 per cent. 

Banks’ profits

The banks’ profits before tax dropped by 30.9 perc ent — the lowest level since the year 2012.

The report attributes the decline to a depressed economic performance and quality of assets held by banks during the year.

However, the sector’s assets expanded at the fastest pace in 10 years to rise by 12.4 per cent in 2020, to Sh5.4 trillion from Sh4.8 trillion in 2019.

“The 12.4 per cent strong growth in assets, compared with 9.4 per cent in 2019, was driven by a faster expansion in non-loan assets — mainly investments in government securities — which grew by 18.5 per cent,” the report shows.

The banking sector’s total income in 2020 rose by 6.9 per cent, higher than a 5.4 per cent growth in 2019.

“This was on account of a strong growth in interest income on loans by 4.5 per cent, interest on government securities at 22.4 per cent, foreign exchange gains 14.7 per cent and other interest and operating income  at 5.4 per cent,” said KBA chairman Habili Olaka in his remarks during the report’s release.

The asset growth was driven by tier-1 banks which invested heavily in government paper as demand for loans deteriorated.

Big banks attracted the largest proportion of deposits as depositors ditched small banks infavour of big ones over concerns small banks may go under. 

KBA expects credit expansion to remain modest in 2021 reflecting a single digit economic growth level.

“All taken together, credit growth is highly expected to be driven by a forward-looking view of credit risk.

In this regard, credit growth is expected to remain modest at best reflecting a single-digit growth level,” the report notes.

Investments in government securities grew by 18.5 per cent, as gross loans and advances grew by 6.7 per cent growth during the period.

Banks awash with deposits piled in cash in government securities as a cash crunch at Treasury forced issuance of bonds to fight Covid-19 and mitigate against declining tax revenues. 

Net loans and advances grew by 9.1 per cent in 2020, to close at Sh2.93 trillion from Sh2.63 trillion in 2019. However, the asset composition saw minimal changes in the year. 

System deposits

The banking system deposits maintained their strong growth trajectory. Bank deposits in 2020 grew by 13.1 per cent, up from 8.3 per cent in 2019, to close at Sh4.11 trillion.  

This was reflective of asset reallocation driven by high uncertainty, the report says, adding that the buildup of deposits during the year outpaced gross loans growth, enhancing liquidity in the banking system.