Moody’s Ratings has downgraded the rating of KCB Bank Kenya, Equity Bank Kenya and Co-operative Bank of Kenya citing weakened credit profile of the government.
The ratings agency said in a statement that it has downgraded the long-term deposit ratings of the three banks to Caa1 rating from B3 with a negative outlook given their high sovereign exposure, mainly in the form of government debt securities. The two ratings indicate obligations that are speculative and have a high credit (default) risk.
“The banks’ high sovereign exposure, mainly in the form of government debt securities held as part of their liquid assets, renders the banks’ capital, profitability and liquidity vulnerable to a sovereign stress event. In view of these links between sovereign and bank credit risk, these banks’ standalone credit profiles and deposit ratings are constrained by the Caa1 rating of the government,” said Moody’s in a statement.
The downgrade of the three banks follows the July 8 decision by Moody’s to downgrade Kenya’s sovereign rating downgrade to Caa1 negative from B3 negative citing “significantly diminished” capacity to increase tax revenue and dial down on the pace of tapping debt after dropping the Finance Bill 2024.
Moody’s said the downgrade in ratings capture the high interlinkage between the banks’ credit profile and that of the Caa1 rating that has been assigned to the Kenyan government.
The agency added that the downgrade was also in recognition that Kenyan banks are facing challenges in the operating environment that have led to elevated asset risks, including a rise in defaults on loans.
“Specifically, Kenyan households and corporations continue to be affected by high lending rates and tight monetary conditions, at a time when the sovereign is facing fiscal constraints, leading to tax hikes in the past couple of years, cutbacks in spending, and government recurring delays in paying contractors,” it said.
Commenting on KCB Bank Kenya, Moody’s said the bank has high exposures to the sovereign through its holding of government securities, standing at around 2.5 times its tangible common equity (TCE) as of March 2024. TCE is a measure of a company’s capital, which is used to evaluate its ability to deal with potential losses.
Moody’s noted that Equity Bank’s exposure to the sovereign through its holding of government securities stood at around 2.4 times its TCE as of March 2024 while that of Co-op was 1.6 times during the same period.
KCB closed March with a non-performing loan ratio of 18.9 percent while that of Equity and Co-op stood at 14 percent and 14.5 percent.
According to Moody’s, the high problem loans point to a tough operating environment.
“The outlook on the banks’ long-term deposit and issuer ratings, where applicable, is negative, in line with the negative outlook on Kenya’s sovereign rating. Any potential deterioration in Kenya’s creditworthiness will also weaken the banks’ own creditworthiness, given their high direct exposures to the sovereign,” said Moody’s.
It added that the banks’ ratings could be downgraded if Kenya’s sovereign rating is downgraded, or if the banks’ capital and liquidity metrics are severely weakened in the currently challenging environment.
Kenya is among the countries in Africa where the government’s financial standing has a major influence on the performance and risk perception of banks.
The banking sector increased its investment in government debt securities to Sh1.8 trillion last year, up from Sh1.7 trillion in 2022, according to the latest bank supervision report.
Customer deposits meanwhile rose to Sh5.5 trillion from Sh4.7 trillion over the same period. This means that about a third of the customer deposits are held in Treasury bills and bonds, making it critical for the government to continue servicing its obligations as they fall due.
The institutions’ total shareholders’ funds stood at Sh972.6 billion at the end of last year, dwarfed by their liabilities, including customer deposits.
