National Bank’s Net Profit Shrinks 76.8%

National Bank of Kenya (NBK) reported net profit of Ks521 million for the nine months to September 2016, a 76.8% decrease compared to a similar period last year. But interest revenue, which is the income from offering loans to customers, rose 16% to Ks6.6 billion.





 
What caused the profit hit?
Increased provisioning for bad loans was responsible for National Bank’s profit plunge. The company significantly boosted its cushion for sour loans to Ks1.9 billion compared to Ks586 million in the same period last year.

Because loan provisions are booked as expenses, National Bank’s operating expenses shot up 37% to Ks7.7 billion. Though higher loan provisions ate into the bank’s profits, the management sees increased provisioning as an investment that should pay off in the long run as the company would not only be in compliance with regulatory requirement but also more flexible to advance loans at reduced risks to its capital.

The 16% increase in interest revenue signal bright prospects for National Bank’s loan business. The company could see continued strong demand for its loans because the interest rate cap by the central bank has lowered the cost of borrowing and this is likely to entice more customers to take loans. Selling more loans should offset the impact of interest rate cap on National Bank’s interest revenue.

Pending rights issue
National Bank is majority owned by the government of Kenya. Shareholders gave National Bank the green light to raise Ks13 billion in through a rights issue. The rights issue would significantly boost the lender’s capital base.
 

National Bank shares are up 28% for the month, but down more than 50% since the beginning of 2016. The stock is also down more than 71% for the last three years. National Bank is a component of the Nairobi All Share Index, the benchmark index of all equities traded on the Nairobi Securities Exchange (NSE). The index is down 0.15% for the month.

National Bank competes for market share with Equity Group (EQTY), Co-Operative Bank of Kenya (COOP), Kenya Commercial Bank (KCB) and Barclays Bank (BBK).