Non-performing loans earn NIC negative outlook rating

A South African ratings company has awarded NIC Bank a negative outlook following a spike in its non-performing loans.

Global Credit Ratings (GCR), however, held NIC’s long and short term ratings at A+(KE) and A1(KE) respectively “with the outlook accorded as Negative”.

“These positive rating drivers have recently been somewhat counterbalanced by significant deterioration in asset quality,” said the GCR in a credit report.

The bank’s bad debts had risen to Sh12.5 billion in the period ended June constituting 11.2 per cent of its total loan book of Sh112.1 billion.

Ratio of bad debts at the NIC bank shot up last year from 3.9 per cent of its loan book at the end of 2014 driven by rising interest rates and an unfavourable business environment. A negative outlook signals that NIC’s credit rating is likely to be lowered in future if the identified weaknesses persist.

The GCR said the increase in market share, continued solid financial performance and reduced reliance on wholesale deposit will positively impact the banks rating.
The lender’s net profit in the period ended June stood at Sh2.3 billion compared to Sh2.2 billion a year earlier.

NIC non-performing ratio surpasses the industry average of 8.4 per cent, which is at a decade high. For the industry, loans worth Sh190 billion had not been serviced for a period exceeding three months compared to Sh170 billion in March.

“The increase in gross non-performing loans was mainly attributable to borrowers’ cash flow constraints due to low business activity and recent retrenchment of staff some of whom had taken up loans with banks,” said Central Bank of Kenya (CBK).

READ: NIC’s bad loans double as profit rises to Sh4.4bn

One of the loan defaulters at NIC Bank is Mombasa-based businessman Tahir Sheikh Said who has outstanding loans of over Sh1.4 billion.

The GCR rating was conducted before the law capping interest rates came to effect. The new law capping lending rates is set at four percentage points above a base rate by CBK which is assumed to be the Central Bank Rate (CBR).

With the CBR currently at 10.5 per cent NIC has set its maximum lending rate at 14.5 per cent. The law also sets a floor for deposit rates at 70 per cent of the base rate which has been calculated to be 7.35 per cent.

NIC bank’s higher exposure to corporate clients has seen analysts cite it as one of the lenders to be least affected by the new law though.

Corporate clients tend to bargain for high returns on deposits and low credit rates. The bank also has bulky portfolio of foreign currency denominated loans, which are not affected by the interest caps.

This signals a lower cut to the net interest margins meaning its profitability will not take a hard hit as is expected of other lenders.

The Kenya Deposit Insurance Corporation recently appointed NIC to be the receiver manager of Imperial Bank and the lender could buy some of its assets. The bank was put under receivership following disclosure of fraudulent insider lending.