The top 10 banks in 2020 in Kenya accounted for 77.7 percent of industry assets, 80.7 percent of loans and 78.6 percent of deposits, with the proportions largely unchanged from their 2019 levels.
This is according to a new report by Kenya Bankers Association which reveals that over the same period, the bottom 10 banks accounted for 2.5 percent, 2.2 percent and 2.0 percent of industry assets, loans, and deposits, respectively.
During the period under review, banking sector total assets expanded in 2020 by 12.4 percent, ending the year at Sh5.4 trillion from Sh4.8 trillion in 2019, data from the Kenya Bankers Association has shown.
The 12.4 percent strong growth in assets, compared with 9.4 percent in 2019, was driven by a faster expansion in non-loan assets, mainly investments in government securities, which grew by 18.5 percent, compared to 6.7 percent growth in gross loans and advances.
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“Amidst deteriorated economic performance and quality of assets held by banks, the provisioning for loan losses increased by 47.5 percent to Sh198.1 billion in 2020 from Sh134.3 billion in 2019. At the industry level, loan loss provisions absorbed 45.7 percent of NPLs compared to 40.2 percent in 2019.”
Despite the above scenario in market shares, analyses of market concentration based on the Herfindahl-Hirschman Index (HHI), show that the market is not concentrated. “In particular, the HHI index for 2020 stood at 736.20 compared with 727.40 in 2019 (Figure 22), reflecting a competitive market structure,” the report.
Overall, the share of loans and advances in the sector that stood at 49.3 percent of total assets in 2020, contracted by 2.6 percentage points compared to its share in 2019.
This decline reflected less appetite by banks to grow their loan books mainly due to elevated credit risk following heightened uncertainty in the performance of the economy.
Consequently, the share of the relatively-less-risky asset classes rose during the period.
The industry financial performance in 2020 saw a modest growth in total income, rising total operating costs largely driven by increased expenses on loan loss provisions, reflecting increased cost to income ratio.
Net interest margin dipped marginally as the cost of funding on average remained largely unchanged. These developments differed across bank sizes.
Overall profitability of the banking sector fell drastically in 2020, as profit before tax dropped by 30.9 percent, reflecting the lowest levels since 2012.
The industry average ROA fell to 2.0 percent in 2020 at a pace faster than the trend declines noted over the past few years, and the average ROE also dropped to 13.3 percent during the period from an average of 21.1 percent in 2019.
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While these changes also differed across bank sizes, a comparative analysis of the banking sector’s ROA and ROE against other firms shows that the banking sector profitability reflects moderate profitability.
Analyze of tax contribution of the banking sector shows that the sector contributed Sh42.4 billion in 2020 down from Sh55.4 billion in 2019, largely reflecting the depressing effects of the pandemic on incomes.
While this represents a 23.6 percent drop in the tax contribution, it highlights the extent to which the sector would have contributed more to tax revenue had it not borne most of the weight of supporting other sectors of the economy.
“In fact, the implicit tax rate of the industry rose to 39.1 percent in 2020 from 35.7 percent in 2019,” the report says.
The competitiveness of the banking industry market structure in 2020 improved, partly underpinning the sector’s resilience to shocks.
The banking system concentration in assets, loans and deposits that had been declining since 2003, moderated in the last five years partly reflecting recent mergers and acquisitions by top banks as they pursued the benefits of economies of scale.
“The outlook of the banking sector appears strong underpinned by adequate capitalization and liquidity levels, the banking sector’s robust approach to treatment of asset quality deterioration and continued implementation of efficient and resilient business models.”
Nonetheless, the sector’s total contribution to the economy is expected to grow, given its strong indirect “spillover” and multiplier effects on the real economy, especially in ensuring access to credit that is a pre-requisite for growth of enterprises.
