Moody’s sees tough times for small banks

Smaller lenders could be headed for tough times with the State appearing unwilling to support their troubled peers and risk-fear raising their funding costs, credit rating agency Moody’s says.

The agency said the recent closure of Imperial Bank, until then ranked amongst tier II lenders, was likely to result in tougher funding conditions for smaller banks as investor and customer confidence wanes.

“Imperial Bank’s seizure indicates that Kenyan authorities are unlikely to extend support to small and mid-size banks in need. Nevertheless, the larger banks’ systemic importance to Kenya’s financial and payment system leads us to expect some level of government support in case of need,” said the agency in a note.

Imperial Bank was put under receivership last week, becoming the second bank in a span of two months to be closed after scandal-ridden Dubai Bank suffered a similar fate in August.

The closure of the relatively well-regarded lender was a huge shocker in the market as there had not been any obvious red flags over its operations.

With the Central Bank of Kenya (CBK) remaining mum on the magnitude of the malpractices that advised the closure, questions have been raised on whether capital injection would have salvaged the lender from being put under statutory management.

READ: Sh58bn deposits locked in Imperial Bank shutdown

Moody’s noted that the government has never bailed out a bank but had supported other corporates such as retail chain Uchumi Supermarkets, Mumias Sugar Company, Kenya Airways, and energy utility firms Kenya Power and KenGen.

Moody’s however expects the government to step in if any of the six large banks was to fall into trouble. The six—Kenya Commercial Bank, Equity, Barclays, Standard Chartered, Co-operative and Commercial Bank of Africa—control more than half the banking sector assets and deposits.

Almost half the banks operating in Kenya are ranked as small banks. They are 21 out of 43. Moody’s expects confidence towards these banks to be dented making it difficult for them to attract deposits and raise capital.

“We expect market confidence toward smaller Kenyan banks to suffer. This may include both deposit withdrawals and a hike in interbank rates while their ability to offer correspondent banking-related services would be impaired,” said Moody’s.

The CBK and Kenya Bankers Association have come out to assure the market that the closure of the two lenders was not informed by their size but on specific issues affecting each of them.

“CBK continues to assure the public that Kenya’s banking sector remains safe and robust,” said CBK Governor Patrick Njoroge in a statement.
Small lenders have also upped their marketing as they sought to assure of their financial health.