OUTLOOK

Kenyan banks macroeconomic profile weak - Moody's

Cites high credit risk, low wealth levels, weak institutions and high financing needs.

In Summary
  • Kenya’s top eight banks cut their loan loss provision by nearly half last year
  • According to CBK, gross NPLs to gross loans stood at 14 per cent in February 2022, compared to 13.1 per cent in December 2021.
The Central Bank of Kenya along Haile Selassie Avenue./FAITH MUTEGI
The Central Bank of Kenya along Haile Selassie Avenue./FAITH MUTEGI

Moody's, an international credit rating agency has classified the macroeconomics of local banks as weak, citing high credit risk, low wealth levels, weak institutions and high financing needs. 

The negative outlook is despite local lenders registering high profits for the year ended December 31, 2021, with the trend expected to persist in the first three months of the current financial year. 

''Bad loans will likely remain high, a reflection of long-term issues such as corporate governance weaknesses in certain large family-owned conglomerates, government payment arrears and a high average lending rate,'' Moody's said in the latest outlook.

According to the Central Bank of Kenya, the ratio of gross NPLs to gross loans stood at 14 per cent in February 2022, compared to 13.1 per cent in December 2021.

Increases in bad loans were noted in the manufacturing, tourism, restaurant and hotels, building and construction and real estate sectors.

They were attributable to specific challenges in the respective businesses, and banks have continued to make provisions for the NPLs

The top four banks in the country reported higher non-performing loan rates at the end of year financials, with that of KCB Group for instance rising to 16.5 percent from 14.7 per cent. 

While that of Equity, Coop Ban and NCBA dropped, they remained relatively high compared to the pre-Covid-19 situation. Equity Bank's NPL ratio dropped from 11 per cent to 8.3 per cent over the course of the year.

Gross non-performing loans and advances of Co-op Bank Group declined to Sh49.7 billion in 2021 from Sh59.1 billion in 2020, indicating an improvement in the lending environment.

Generally, the stock of bad loans increased to Sh122.8 billion from Sh96.6 billion.

Moody's is also critical of the proposed risk-based lending saying that the policy is likely to trigger high-interest rates and lockout many out of the credit circle.  

So far, CBK has approved risk-based pricing plans for six commercial banks led by Equity Bank which is offering loans at between 12 and 19 per cent. 

The rating firm also cited high financing needs by both the government and private sector which is beyond lenders' capacity. 

Other factors include high risk associated with upcoming general elections, ongoing supply glitches in the global market and currency fluctuation due to Russia -the Ukraine war. 

Local banks have started to announce Q1, 2022 financial results, with HF Group for instance reporting Sh34 million during the period under review, breaking an almost five-year loss cycle. 

Kenya’s top eight banks cut their loan loss provision by nearly half last year, helping to lift their combined net profit by 80.29 percent to Sh132.41 billion.

KCB, Equity, Co-op Bank, Absa Bank Kenya, NCBA, Standard Chartered Bank Kenya, DTB and Stanbic Holdings cumulatively slashed provisions to Sh55.93 billion in the review period, from Sh106.94 billion in 2020 — reflecting a drop of 47.69 percent or Sh51 billion.

The drop in loan loss provisioning helped most of the banks to post double to triple-digit profit growth and usher in a dividend boom.