Patrick Kagunya is the Director Financial Advisory at Getworks and Chief Executive Officer at Wescotts Financial Consultants. He offers some insight on how to tell if your bank is in trouble.
With Chase Bank in receivership most depositors must be asking themselves so which bank is safe ?
Spotting trouble isn’t easy (witness the current crisis), but there are some warning signs, if you know where to look. The KDIC and CBK keeps these quarterly financial reports on every Kenya financial institution.
Clearly, economic conditions have changed in the last three months, and as detailed as these reports appear to be, there still are plenty of unknowns. However, these reports do offer some clues as to your bank’s ability to weather the storm.
First, a healthy word of warning: A few numbers in a report don’t mean you should snatch your funds and run for cover. If you’re worried that your bank might teeter, don’t panic. Talk at length with your financial adviser before making any sudden moves. If you want some extra protection in the meantime, think about diversifying your risk by making additional deposits in a few other banks.
One important measure of a bank’s financial stability is its risk-based capital ratio. By law, commercial banks need to keep a certain amount of capital on hand to cushion their loan portfolios. The CBK mandates that a bank’s risk-based capital be no less than 8% of its total assets.
Next, look at the bank’s loan-to-deposit ratio. Even if your bank didn’t lard up on mortgage-backed securities, it might still be “loaned up”–meaning that it has maxed out its percentage of loans to deposits on hand. The larger that percentage, the greater the risk the bank has taken on. If customers begin to pull deposits, the bank might be suddenly strapped for cash.
Healthy loan-to-deposit ratios typically fall between 95% to 105%,. Venture much higher than that and the bank could be courting trouble. To find this ratio, divide “loans and leases, net of unearned income and allowance” by “deposits”.
A third metric is the percentage of the amount of non-current loans (those 30 days or more past due) vs. total amount lent. Some fraction of those non-current loans will have to be written off, eating into the bank’s precious capital.
“When 10% of your loans are non-performing, that starts to become very problematic,”.
To calculate your bank’s percentage, divide the total amount of loans that are 30 days or more past due by total loans and leases.
If your bank is struggling and the KDIC takes it over, know that you may not have access to your funds for several days during the change-over period. To be safe, small-business owners should have a week’s worth of operating expenses deposited in more than one bank.