A number of banks have gone under due to effects imposed by respective financial institutions’ loan performances.
A financial expert says when it comes to making a decision on determining the quality of a bank there was a need to look at the performance of loans.
“Unlike when dealing with the manufacturing industry, where one can see a plant, for the banking sector the instruments are qualitative because you have a very big loan portfolio which makes part of the big balance sheet,” Addington Jerahuni, a senior equity analyst at Sanlam Investments told CNBC Africa.
Jerahuni added that a quality bank should have provisions that are very prudent and be able to cover non-performing loans.
A non-performing loan is one that is in default or close to being in default.
“The proportion of the non-performing loans should be lower or below industry average,” explained Jerahuni.
He further added that delays in payment contributed to perceptions that informed whether a bank was performing well or not.
Jerahuni explained that when you start looking at a bank with non-performing loans that keep going up over time then it is very important to start analysing what has led to that uptick in non-performing loans.
“In Kenya last year we had a bit of a uptick mainly because the government was getting into an election and there were delays on some of the contracts that had to do with the government,” he said.
“Looking at it, at that point, it was a bit scary as some of the non-performing ratios had peaked from around five per cent ratio to around eight per cent point.”
Jerahuni says the level of unsecured loans against secured loans also plays a role in determining the quality of a bank.