In the first quarter of 2024, Kenyan banks witnessed a reduction in their balance sheets, as highlighted by the Central Bank of Kenya. The sector’s assets shrunk by 2.7% to $58.2 billion (KES 7.5 trillion) during this period, primarily influenced by an 18.5% decrease in foreign currency loans amounting to $7.6 billion. Additionally, banks scaled down their investments in government securities by $474.3 million (KES 61 billion).
Possible Implications of Asset Decline
The diminishing assets of the banks might signify a decreased interest in dollar-denominated loans due to a strengthening shilling and stricter credit conditions. Notably, net loans and advances remained a significant component of the total assets, accounting for 49.4% in Q1 2024, slightly lower than the 49.7% recorded in Q4 2023, as reported by the CBK.
Strategic Adjustments in Response to Economic Environment
In response to the tough macroeconomic landscape, banks resorted to offloading short-term bonds to mitigate fair value losses. These actions were concurrent with the Central Bank’s tighter monetary policy aimed at combating inflation, which has repercussions on bond prices.
Impact on Loan Dynamics and Customer Deposits
Elevated inflation and subsequent interest rate hikes in early 2024 hindered economic activities and raised the cost of borrowing for firms and individuals. Consequently, the demand for loans and customer deposits decreased, with gross loans contracting by 2.8% to $31 billion (KES 4 trillion) in Q1 2024 compared to $31.8 billion (KES 4.1 trillion) in Q4 2023.
Sector-Specific Loan Reductions
The decline in gross loans was particularly notable in sectors such as manufacturing, energy and water, personal and household, as well as tourism, restaurant, and hotels. Notably, the decrease in loans was primarily attributed to higher levels of loan repayments within these sectors, according to the CBK.
Shifts in Customer Deposits Composition
Customer deposits, a key funding source for banks, recorded a decrease of $2.2 billion (KES 286.7 billion) to $42.6 billion (KES 5.5 trillion) in Q1 2024. The decline underlines reduced banking activities amid escalating living costs and a challenging macroeconomic environment for businesses.
Foreign Currency and Local Deposits Dynamics
Foreign currency deposits experienced a significant decline, dropping by 14.6% to $12.4 billion (KES 1.6 trillion), reflecting factors such as a strong Kenyan shilling and past FX liquidity challenges. Conversely, local currency deposits witnessed a marginal decrease of 0.2% to $29.4 billion (KES 3.8 trillion).
Continued Relevance of Customer Deposits
As of the end of Q1 2024, customer deposits remain the primary funding source for banks, contributing to 73.6% of the banking sector’s total liabilities and shareholders’ funds, as outlined by the CBK.