Kenyan banks recorded currency losses of about Ksh50 billion in the first half of the year when translating financial statements of regional subsidiaries into Kenyan shillings due to the appreciation of the shilling during the period.
The shilling has appreciated by between 19 and 31 percent against the currencies of Uganda, Tanzania, Rwanda, Burundi and the Democratic Republic of Congo since the start of the year, reversing a depreciation trend in the local unit in 2023, when it was one of the world’s worst performing currencies.
Regional subsidiaries of Kenyan banks usually prepare their financial statements in local currency (functional currency), but when they are consolidated into the group, the currency is converted to shillings (reporting currency).
This means that there are exchange rate losses or gains, depending on whether the shilling has strengthened or weakened against the operating currencies of the subsidiaries.
These currency translations affect the value of assets, liabilities, earnings, and cash dividends or distributions paid to the parent company.
For example, a loan recorded in the books of a subsidiary in Uganda and denominated in Ugandan shillings will be worth less when translated into Kenyan shillings in the group’s books if the local currency appreciates against its Ugandan counterpart.
Dollar-denominated assets have also seen their value fall due to the appreciation of the shilling against the dollar this year.
Equity Group, which operates in Uganda, Tanzania, Rwanda, the Democratic Republic of Congo and South Sudan, recorded a foreign exchange loss of Sh21.26 billion in the six months to June 2024, compared to a gain of Sh6.3 billion in the first half of 2023.
The Democratic Republic of Congo is the bank’s largest regional exposure, with its subsidiary Equity BCDC accounting for 30.4 percent of the group’s total assets of Sh1.88 trillion, followed by Uganda at 6.1 percent.
The Congolese franc has fallen 31 percent against the shilling this year, while the Ugandan shilling has fallen 19 percent.
The Kenyan shilling has appreciated by 31% against the Tanzanian shilling this year, by 27.5% against the Rwandan franc and by 23% against the Burundian franc.
The DRC also uses the US dollar as a medium of exchange in its domestic economy, meaning the shilling’s 21% gain against the US currency also contributed to foreign exchange losses for Kenyan banks operating in the country.
KCB Group is also active in the Democratic Republic of the Congo, having acquired Congolese bank Trust Merchant Bank (TMB) in 2022. It also acquired a majority stake in Rwandan bank Banque Populaire du Rwanda Plc (BPR) in 2021.
KCB, which also has branches in Uganda, Tanzania, Rwanda, Burundi and South Sudan, reported a foreign exchange loss of Sh17.6 billion in the first half of 2024, compared to a gain of Sh2.45 billion in the corresponding period of 2023.
NCBA Group, I&M Group and DTB, which have different regional branches in Rwanda, Uganda, Tanzania, Mauritius and Burundi, also incurred losses on currency translation.
I&M’s foreign exchange loss stood at Sh7.1 billion compared to a gain of Sh2.2 billion in June 2023, while NCBA’s translation loss stood at Sh2.87 billion, reversing a gain of Sh1.2 billion in the first half of last year.
DTB Bank has yet to release its half-year results for 2024, but in the first quarter of the year, its foreign exchange losses from regional operations amounted to Sh6.7 billion.
Although the contribution of regional units declined due to foreign exchange losses, Kenyan banks still recorded higher profits this year, thanks to higher interest rates that boosted interest income.
KCB Group led the industry in terms of profits during the period, with its net profit rising 87 per cent to Sh29.1 billion. The bank’s Kenyan unit contributed Sh21.2 billion to the net profit.
Equity Group’s net profit rose 12.1 percent to Sh28.54 billion, with its regional subsidiaries posting a combined profit after tax of Sh13.7 billion.