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Small banks shareholders’ miss out on dividends

Most tier2 and tier 3 lenders still struggling.

In Summary

•Some lenders have reported profit drops with others reporting marginal growth.

•Financial Risk Analyst Mihr Thakar terms "risk pricing ability” as the main problem in the lower segment of the banking industry.

A cashier counts dollars and shillings/
A cashier counts dollars and shillings/
Image: Fredrick Omondi

Hefty profits by big banks has left shareholders smiling all the way to the bank, but this is not the same to those who invested in small banks.

"Smiley shareholders," a Twitter user, @DollyOgutu, tweeted following the huge profit and dividend pay-outs announced by the big boys.

Banks that had cut or frozen payouts have now increased or revived dividend payment, while those that maintained them in the pandemic are expected to continue, says Ogutu.

Equity Group is set to pay shareholders a record dividend of Sh11.3 billion at Sh3 per share for the year ended December 2021, as net profit nearly doubled to Sh39.1 billion.

KCB board on the other hand has recommended a final dividend of Sh2 per share which will amount to Sh6.43 billion.

Co-operative Bank which continued with dividend payment despite the pandemic is paying Sh1 per share, totalling Sh 5.9 billion.

However, shareholders in tier 2 and tier 3 banks continue to miss out on  returns on investment, as most of the lenders report low profits amid high operating expenses.

They are yet to shake off the Covid-19 pandemic impact, among them high loan defaults. 

Bank of India, a tier-three bank, will not pay dividends despite its profit after tax for the year ended December 2021, increasing 26 per cent to Sh2.9 billion, from Sh2.3 billion.

Its loan book increased to Sh15.5 billion from Sh14.2 billion, while customer deposits rose to Sh52.6 billion, compared to Sh48.8 billion the previous year.

The lender reduced its loan loss provision to Sh243.9 million from Sh408.8 million, reducing concerns of customer defaults

During the year, its total non-performing loans shrunk to Sh622.5 million from Sh988 million.

Tier three lender Victoria Commercial Bank has reported an 8.9 per cent drop in profit after tax for the year ended December 31, as it remained holding government securities (available for sale) totalling Sh5.9 billion.

Its profit totalled Sh466.5 million, a drop from Sh511.9 million the previous year.

The lender saw NPLs balloon to Sh4.1 billion up from Sh1.5 billion as it pushed up its loan loss provision by Sh900 million to Sh2.1 billion.

Sidian Bank, despite a significant jump in profit after tax, from Sh18.8 million to Sh486.2 million, has not recommended dividend payment.

During the year under review, total interest income increased to Sh3.5 billion from sh2.4 billion.

Operating expenses however wiped out some of the gains after rising to Sh2.5 billion from Sh2.1 billion, mainly loan loss provision of Sh475.5 million, up from Sh187 million, rental charges, directors remuneration and staff costs.

Its total NPLs also increased to Sh2.5 billion from Sh2.04 billion.

The lender has however fully recovered from a previous two-year loss streak of Sh406 million in 2017 and Sh374 million in 2018.

It bounced back to profitability in 2019 when it reported a net profit of Sh112 million before the 2020 drop occasioned by the pandemic.

Financial Risk Analyst Mihr Thakar said risk pricing ability is the main problem in the lower segment of the banking industry.

“Small banks need to pay high-interest rates to attract deposits. In the absence of the ability to price for risk, their margins are constrained and hence they are unable to transition from a period of high retention to a period of stable growth,” said Thakar.

The banking sector however remains stable and resilient, according to the Central Bank of Kenya (CBK), with strong liquidity and capital adequacy ratios.

The ratio of gross non-performing loans (NPLs) to gross loans stood at 13.1 percent in December 2021, compared to 13.6 percent in October, it noted in its latest MPC briefing.

Repayments and recoveries were noted in the manufacturing, personal and household, transport and communication and building and construction sectors.

“The banking sector registered a strong performance in the year ended December 31, 2021, with the asset base increasing by 11.1 percent from Sh5.4 trillion at end of 2020, to Sh6 trillion,” governor Patrick Njoroge said.

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