In the latest sector analysis, Fitch Rating says high inflation, slowing gross domestic product (GDP) growth including a faltering Eurozone and severe drought will affect banks' business conditions.
According to the report, the ensuing primary impact on banks’ credit profiles will come from elevated asset quality risks, but strong capital buffers underpin banks’ ability to absorb moderate shocks.
The report further shows that Kenyan banks’ ratings are most sensitive to a downgrade of the sovereign rating, which is on a negative outlook, given the high concentration of banks’ operations within Kenya and significant sovereign debt exposure.
Fitch Ratings forecasts the average non-performing loan (NPL) ratio for large banks will increase to around 14 per cent in 2022 from 12.7 per cent last year as weaker economic conditions and increasing inflation feed through to borrowers.
''High default rate would hit the local deposit money banks with the expectation that loan loss provision will inch higher in the current year amidst fast-changing global market dynamics,'' the report shows.
The Kenyan banking sector's non-performing (NPL) ratio rose to 14.7 per cent at the end of the second quarter of the financial year 2022 from 14.1 per cent at the 2021 year-end versus 14.5 per cent in 2020.
Even so, Fitch notes that the country’s large banks’ strong profitability with 3.5 per cent return on assets in 2021 and 23.8 per cent return on equity will remain a credit strength in 2022 despite adverse conditions and rising loan impairment charges.
The bank's pre-tax profit for the sector rebounded strongly, up 76 per cent in 2021 on the back of materially lower impairment charges and stronger earnings.
“We believe net interest income will benefit from the approval of banks’ risk-based pricing models by the Central Bank of Kenya (CBK) and the rising interest rate environment”, Fitch said.
According to the report, regional expansion and deployment of digitalisation will support large banks’ earnings, the rating note said.
The positive trend was supported by lending to small, medium enterprises (SMEs) and households increased following the post-pandemic recovery and the approval of banks’ risk-based models.
However, analysts explain that banking sector capitalisation strengthened in 2021 due to higher retained earnings seen across the industry amidst a slowdown in Euro market raise.
Fitch said in its rating note that the average total capital adequacy ratio (CAR) for the larger banks increased to its highest level over the past four years, printed at 18.8 per cent in 2021 versus 18.5 per cent in the preceding year.
"Large Kenyan banks are well-funded by stable and low-cost domestic customer deposits, supported by established domestic franchises and wide distribution channels," Fitch says.
Last week, local banks stored a record Sh307 billion as reserves in August, the highest cushion ever by the industry according to publicly available data from the Central Bank of Kenya (CBK).
This from a lower cover of Sh265.4 billion in July 2022.
The higher reserves by lenders are despite the CBK maintaining a lower cushion requirement with the cash reserve ratio set at 4.25 per cent since March 2020 with the view of supporting private sector credit growth during the stay of the Covid-19 pandemic.
Commercial banks in Kenya are required to keep a specified proportion of their total deposits at the CBK with the reserve bank adjusting the minimum requirement to influence the money supply in the economy.
The cushion which is based on banks’ total domestic and foreign currency deposit liabilities is used to facilitate commercial banks’ liquidity management.
The stretch in bank reserves aligns largely to improved profitability for the industry with the better sector operating metrics allowing lenders to increase the cushion.
According to additional data from the CBK, profit before tax for the sector rose to Sh163.3 billion in August 2022 compared to Sh127.8 billion at the same time last year.
Commercial banks have been tipped to nearly double their earnings again this year from a pre-tax profit of Sh194.8 billion in 2021.
Banks operating metrics have remained above CBK’s statutory requirement with the average liquidity ratio for instance standing at 51.6 percent in August.
The industry’s total assets currently stand at Sh6.4 trillion to include Sh3.6 trillion in gross loans to customers.
