Barclays (BBK) reported net profit for the nine months period to September 2016 declined 5% year-over-year (or YoY).
Net profit of Ks6.06 billion for the latest period translated to EPS (earnings per share) of Ks1.12, down from EPS of Ks1.18 a year earlier. But what exactly caused the profit dip at Barclays?
A closer look at the bank’s financial statement reveals that the soft earnings for the nine months period were not purely a result of payroll or rental costs spiralling out of control. Instead, the bank took the commendable initiative to boost its loan provisions and that ate into its profits for the latest period. It should be a short-lived impact. Loan provision is the financial cushion that lenders put in place to ensure that their lending activities are not hampered in case borrowers default on loans.
Barclays more than tripled its loan provision to Ks3.1 billion during the just reported period.
What’s driving loan provisions up?
While increasing loan provisions may be seen as a hedge against market uncertainties, it could also signal disturbing market conditions for lenders. Keep in mind that several large Kenyan banks including Equity (EQTY) and Kenya Commercial Bank (KCB) have recently boosted their loan provisions.
While increasing loan provisions may be seen as a hedge against market uncertainties, it could also signal disturbing market conditions for lenders. Keep in mind that several large Kenyan banks including Equity (EQTY) and Kenya Commercial Bank (KCB) have recently boosted their loan provisions.
Nevertheless, the trend by lenders of increasing provisions for loans seems to have more to do with regulatory requirements than deteriorating market conditions. Anyone who has been following local news may have noticed increased scrutiny of the financial sector since Patrick Njoroge, a former IMF official, took over as the governor of the Central Bank of Kenya (CBK).
Njoroge has sought to tighten regulations of the country’s financial system to ensure economic stability, which should pay off for banks in the long-haul in form of increased borrowing and reduced credit risks.
The other indicator of bright prospects for Kenyan lender can be seen from the cap in lending rates. Though banks initially protested the move, they like the fact that interest rate cap will lower the cost of borrowing and reduce default rates.
For Barclays, the bank seems to be going beyond hoping for a windfall as low interest rates boost demand for credit. The company can be seen investing in new growth opportunities to diversify its revenue streams and improve profitability.
In one such move, Barclays recently sank Ks2.8 billion in First Assurance Company to take a majority stake of 63.3% in the firm to bolster its bancassurance offerings. Bancassurance describes an arrangement between a bank and an insurance company to sell bank customers bundled products that include insurance cover.
Barclays’ sector peers include Equity Group (EQTY), Kenya Commercial Bank (KCB) and Co-operative Bank of Kenya (COOP).
Barclays stock rose 1.7% to close at Ks9 on November 16. The stock is up 10.4% over the last month up but down 33.8% year-to-date (or YTD).
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