Loan default at Kenyan banks to hit 14% - Moody's

South Africa and Mauritius have the least NPLs in Africa at four and five per cent while Angola has the highest at 33 per cent.

In Summary
  • The rate of nonperforming loans in the country is currently at 12.5 percent, the highest in East Africa
  • It expects Kenyan banks’ return on assets to drop toward 2%t over the next 12-18 months
CBK Headquarters
CBK Headquarters
Image: FILE

Global credit rating firm Moody’s has projected a higher loan default rate of 14 per cent with a more significant risk expected in 2021.

It however expects the Central Bank of Kenya’s (CBK) policy measures to promote loan restructuring and payment deferrals to reduce the severity of borrower stress this year.

''Some borrowers, primarily smaller borrowers and those in vulnerable sectors, will eventually default, however, and NPL formation will pick up from 2021,’' Moody’s banking system brief on Kenya reads in part.


The loan default rate at Kenyan banks rose steadily between September 2015 to June 2018, and have hovered between 12-13 per cent of gross loans for the following two years.

Since the coronavirus outbreak, NPLs increased to 13.1 per cent in April-June from 12.5per cent in March, weaker than most regional peers, with Tanzania and Uganda’s NPLs captured at 10 and 9.2 per cent respectively.

South Africa and Mauritius have the least NPLs in Africa at four and five per cent while Angola has the highest at 33 per cent.

The New York-based rating agency said that payment holidays will not lead to automatic NPL classification as long as banks continue to expect the borrower to repay at some point, something difficult to ascertain under current conditions.

''Accordingly, we expect problem loans to increase faster in 2021 when payment holidays are likely to expire and non-viable borrowers are identified,’’ Moody’s says.

The agency adds that forward-looking loan-loss provisions will lead to higher provisioning charges this year. Total provisioning coverage was around 59 per cent as of June 2019, which is roughly in line with regional peers.

It however expects provisioning coverage to initially strengthen, but will start falling as new NPLs surface.

Since the coronavirus outbreak, loans totaling Sh844 billion (29 per cent of banking sector loans) were restructured as of June. Of this, restructured

Personal/household loans amounted to Sh240 billion, or 30 per cent of gross loans to this sector.

Other hard-hit sectors include trade (22.9per cent of gross loans), real estate (19.5 per cent), transport and communication (16.3 per cent) and manufacturing (14 per cent).

The report further shows that credit growth, which had rebounded after the removal in November 2019 of a commercial lending rate, has constrained credit growth by encouraging low-risk sovereign investments over private-sector loans, and larger customers over riskier MSMEs.

Data by CBK shows private-sector credit increased by nine in April 2020, from 6.6per cent in October 2019, but growth has since slowed to 7.6per cent in June from last year and remains lower than most East African countries.

''We expect it to slow further as both lending demand and loan supply are sapped by the coronavirus-related economic disruption, despite lower rates,’’ says Moody’s.

It adds that although Kenyan banks’ loan books are diversified in terms of economic sectors and borrowers, small businesses, to which banks are heavily exposed.

SME risk exposure for tier one banks including Equity Bank, Coop Bank and KCB range between 7-63 per cent.

Kenyan banks also hold high concentrations of loans to the confidence-sensitive real-estate sector - around 15 per cent of lending as of June 2019.

The rating firm expects Kenyan banks’ return on assets to drop toward two per cent over the next 12-18 months, from above three per cent in the past.

Recurring profitability will nonetheless remain strong and absorb higher Provisioning charges without eroding capital.

It added that strong capital adequacy at 18.5 per cent provides good loss absorption capacity and will buffer risks posed by growing NPLs.

Banks’ deposit base will also remain stable, while their liquidity is sound at 47per cent of total assets. Muted loan growth and authorities’ liquidity support will alleviate funding pressures.