- Last week, the firm affirmed Kenya's rating at B2 and maintained its negative outlook
- The negative outlook reflects primarily the banks’ sizeable holding of sovereign debt securities at between 1.3-2.0 times their shareholders’ equity
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Top banks’ large exposure to government securities poses a risk to their credit profile, global rating agency Moody’s has warned, citing the link between their rating and that of the State now with a negative outlook.
The rating firm, however, says the banks retain resilient financial profiles despite a challenging operating environment, thanks to their deposit-funded profiles, strong liquid assets and high profitability.
Last week, the firm affirmed Kenya's rating at B2 and maintained its negative outlook due to significant risks to the government's current efforts to reduce its fiscal deficit and liquidity risk.
It said the country has continued with a monotonous track record in delivering fiscal consolidation and achieving revenue targets, therefore, presenting significant risks to its fiscal outlook.
“An inability to deliver on planned fiscal consolidation will leave Kenya vulnerable to tightening financing conditions,” Moodys said.
According to Moody’s, the outlook for the lenders has changed from stable to negative due to the substantial government bond holdings — at between 1.3 and two times their shareholders’ equity — which links their creditworthiness to that of the government.
“The negative outlook reflects primarily the banks’ sizeable holding of sovereign debt securities at between 1.3-2.0 times their shareholders’ equity, which links their creditworthiness to that of the government,” the agency said in its latest update.
“All three banks’ local-currency deposit ratings of B2 are at the same rating level of the government, and a potential weakening in the government’s credit profile will lead to a weaker credit profile for the banks.”
In the financial year ended December 31, 2020, KCB Group raised its government securities holdings to 1.4 times that of shareholders' equity, Equity Bank Group two times while Cooperative Bank Group raised by 1.8 times.
The problem has been compounded by the coronavirus pandemic, which has hit the economy hard and is the main cause of the downgrade of the government’s credit outlook from stable to negative.
Moody’s added that the virus-induced economic upheaval is also a factor in the shift of the three banks’ outlook to negative.
''To a lesser degree, the negative outlook also captures the elevated risks to the banks' asset quality that will continue to weigh on their profitability over the next 12-18 months,'' Moody's said.
It added that the problem loans already increased for all three banks and it is expected to further weaken from the pandemic and following the gradual withdrawal of coronavirus related support measures, including a loan repayment moratorium that expired in March 2021 which led to around half of banking system loans having payment deferrals.
Moody's rating is coming at the time banks have just reported their Q1 2021 results which signaled improved earnings compared to the end year.
For instance, Equity Group Profit After Tax (PAT) for the quarter ended March grew by a notable 64 per cent to Sh8.7 billion from Sh5.3 billion same period last year.
The improved performance was attributed to steady business recovery after a tough social-economic environment brought about by Covid-19.
KCB Group Plc on other hand shook off the effects of the ongoing Covid-19 pandemic to post a net profit of Sh6.4 billion. The two per cent increase in profitability from Sh6.3 billion a year earlier was on the back of cost-saving initiatives and an increase in net interest income.
Even so, Coop Bank Group's net earnings dropped marginally by 3.6 percent as the lender increased provisioning for loan defaults in a Covid-19 pandemic environment.
Even so, the total net interest income grew 31 per cent. Net lending interest income grew to Sh9.8 billion as the bank expanded its loan book.