The Puzzle Behind Banks 2021 Performance.

Published on 2022 | 04 | 08

What Is Happening?

The month of March saw most listed companies report their 2021 full year earnings. However, banks performance was most notable, drawing much of the attention, with most of them announcing significant increases in profits After tax. But what drove bank performance? In this report, we look at what were the main drivers of increased profitability by reviewing banks listed at the Nairobi Securities Exchange.

In 2020, listed banks reported significant declines in net profits, mainly driven by decline in economic activity because of the pandemic. 

In 2021, they reported notable increases in net profit growth with banks like Equity and NCBA banks recording 146.19% and 145.21% growth in profits before tax in 2021 compared to 33.31% and 51.86% negative growths in 2020 respectively. (See Figure 1) 

Figure 1: Banks record significant improvement in Profits before Tax in 2021 compared to revenue growth.

Net profits reported by banks are a result of expenses deducted from revenues. It is expected that increase in revenues leads to increase in reported net profits, so that revenues drive reported net profits. 

(Revenues – Expenses= Net Profits)

However, net profit growths reported in 2021 did not mainly originate from revenues generated by banks as it is expected. 

A look at banks 2021 revenues compared to profits in figure 1 shows marginal improvements in revenues in 2021 unlike reported profits.

For example, a bank like NCBA in 2021 had a 145% growth in net profits, yet revenues only grew by 6%.  In 2020, revenues grew by 38% but its net profit declined by 52%.

KCB and Equity bank reported 86% and 146% growth in net profits, yet their growth in revenues increased by 13% and 21% respectively in 2021. 

Why did bank profits grow faster than revenues?

The main business of a bank is to take in clients deposits and issue out loans.

Let us assume you are a hotelier and a client to a bank. You walk into a bank seeking a loan. The bank lends you the money based on:

  1. Your ability to pay back.
  2. Collateral you must give.

When you take out a loan there are two probable outcomes; 

1) The business fully pays back the loan or, 

2) The business encounters challenges and is unable to pay back the loan (default).

Whenever a bank issues out a loan, they are supposed to set aside some funds to cater for the probability that the client may default on their loan, the funds set aside is what is called “loan loss provision”. 

What does this mean?  

To provision for your loan, the bank will set aside a predetermined amount of money, based on your loan amount, to protect itself in case you fail to pay back your loan.

This, it must do, whether you are able to pay the loan back or not(default) because it is a set accounting standard and the Central Bank of Kenya and external auditors monitor to ensure banks comply.

For example, if the bank loans your hotel KES 20 million, their risk models may indicate that they need to set aside 5% of the loan issued, that is KES 1 million. The KES 1 million is what is defined as a loan loss provision.

It sets aside such an amount to cater for your probability of default, whether or not you will default.

 “Loan loss provisions” is an expense to the bank and is deducted from revenues to get net profits. (Recall page 1) 

Since revenues drive reported net profits, an increase in expenses reduces net profit reported by banks.

Therefore, if the bank sets aside more money to provision for its client’s loans, its expenses increase and profits decline, but if it reduces that amount, its profits increase and therefore it reports higher net profits.

Why did banks report a decline in profits in 2020?

To answer this, we must ask ourselves ‘What happened in 2020?’ 

As a hotelier in 2020, you might have faced; sudden lockdowns, no clients coming into the hotel, extra expenses to meet regulatory requirements on sanitation, everyone was being encouraged to stay at home, among many other challenges. 

Your regular monthly income, which you use to repay your loan monthly, is cut off.

Due to these challenges, you are unable to pay back the bank and you explain the situation to them.

The bank, upon an assessment of the situation, determines that you will indeed have challenges in repaying and increase provisioning for your loan from the current 5% to 20%. This translates to KES 4 million, an increase of KES 3 million

Remember, as is required by accounting standards, the bank goes ahead to report this increase as an expense and therefore its net profit decline.

Therefore, this led most banks to report declines in net profits in 2020.

Why did loan loss provisions increase in 2020?

Building on what has happened to you as a hotelier in 2020 

Aside from the regular monthly revenue which is cut off, assume you provided the hotel’s building as the collateral for the loan. We will assume that the value of the building is KES 30 million.

Once the pandemic happened, no one would buy your hotel! This is because not only is it not making money, but also because no one wants to part with their money in such an uncertain time. 

Therefore, the value of the property will decline as interested buyers will not be willing to purchase it at market value.

These reasons provide the bank with more impetus to increase its provision for your loan because at this point in time, the risk of your default is too high and the value of the property used as collateral may fall below the value of the loan.

Consequently, since a bank has several clients, and there are many banks in which most of their clients’ loans need to be provisioned, aggregately, all banks increased provisions in 2020. 

These amounts were significant across banks and because of the risks facing many economic sectors in 2020, most banks had to increase their provisions. (See figure 2) These increased provisions ended up reducing profits reported by banks in 2020 since they are reported as expenses.

Figure 2: Loan-loss provisioning significantly increased in 2020 and sharply decreased in 2021.

Why did loan loss provisions decrease in 2021?

To answer this, we must ask ourselves ‘What happened in 2021?’   

In 2021 because of the lifting of lockdown measures and decline in Covid 19 spread, you begin to witness a revamp in customer numbers in your hotel. 

Though customers are not that many, there is recovery in monthly income.

You have a sit down with the bank and they draw up a new payment plan for your loan as business operations resume.

As you begin to make your monthly repayments, the bank has to revise its loan loss provisions from the re- allocated 20%to 10%. 

It does this primarily because you have begun making your monthly contributions towards repayment of your loan, which has reduced your probability of default (not paying).

Because the bank believes you will repay the loan, it does not need to set a huge amount of money aside in case of your default.

Additionally, in the wake of 2021, business have begun re-opening and investors are more willing to spend their money. Therefore, your collateral can be sold in the market at a much better value compared to 2020 in case of default.

The bank therefore can get value for the collateral you deposited to them for your loan.

This also gives them an impetus to reduce their provisioning for your loan.                                                                                                           

Why did banks report significant profits in 2021?

Building on what has happened to you as a hotelier in 2021

Upon an agreement with the bank on your new repayment plan, you begin monthly payments towards your loan.

the bank determines that you will be able to repay your loan and due to the downward revision of your loan loss provisions, it translates to KES 2 million.

As is required by accounting standards, the bank goes ahead to report this decrease in expenses and therefore its net profits increase.

Therefore, this is what led banks to report significant profits before tax in 2021.

Therefore, the increased net profit numbers recorded by banks in 2021 were not mainly driven by increase in revenue, but a decline in expenses, specifically the loan-loss provision expense. 

What is Amanas’s recommendation?

In our earlier polaroid, we pointed out to financial sector(banks) as being good investment opportunities in an inflationary environment as they benefit from higher interest rates on loans issued and, on their investments,

Banks also provide opportunities for dividend investing where you can take advantage of high dividend payouts announced by some of the banks. 

In figure 5, we have included data on dividends announced by listed banks at the Nairobi Securities Exchange.

If in need of further clarity on such opportunities, please feel free to contact the investment team at Amana Capital.


Total income (KES Billions)

Total expenses (KES Billions)

Profit After Tax (KES Billions)



Dividend Payout

Book Closure

Dividend Payment








25-April 2022

26-May 2022

Equity Group







30-June 2022

20-May 2022

Diamond Trust Bank








I & M Holdings







21-April 2022

26-May 2022

Standard Chartered Bank







27-April 2022

25-May 2022

Kenya Commercial Bank








25-April 2022

Co-operative Bank








NCBA Group







29-April 2022

5- May 2022

HF Group









Figure 5: Overall banks performance and dividend information. DPS stands for dividend per share, and includes final and interim dividends. Interim dividends have already been paid by all banks and the dates for book closure and dividend payment relate to the final dividends.

**Data used in analysis such calculation of averages is based on 10 and excludes Stanbic Bank and BK Group, for the purposes of this report.

**Sources for data used have been organically sourced by Amana Capital Research directly from financial statements of the listed banks.


FA Jesse Ludenyo| Research Analyst

Amana Capital Limited.  Growing A Financially Prosperous Community

Unit Trusts | Wealth Management | Pensions

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