Kenya's six largest banks would require at least Sh190.4 billion in fresh capital if each of their top three borrowers were to default on loans, underscoring how exposed they are to corporate customers at a time when defaults are on the rise.
A stress test conducted by the Central Bank of Kenya (CBK) in May to gauge the stability of the banking sector revealed that the big banks were the most at risk if top borrowers defaulted, with the six largest lenders carrying 86.3 percent of the total industry exposure.
A stress test is an analysis to determine whether a bank has enough capital to withstand an economic or financial crisis.
“The most significant shock is a default by the top three borrowers per bank under severe scenarios by December 2025. If the shock materialises, the sector will require Sh220.74 billion to meet the regulatory capital requirement by December 2025,” the CBK said.
“Concentration risk is higher for tier I banks, with six of the nine banks in this group being affected. The six tier I banks account for 86.3 percent of total capital 86.3 percent of total capital shortfall shortfall.”
The CBK did not identify the six banks with the most concentration of borrowers, but the regulator lists nine as large: KCB Bank Kenya, Equity Bank Kenya, Co-operative Bank of Kenya, NCBA Bank Kenya, Absa Bank Kenya, Stanbic Bank Kenya, I&M Bank, Standard Chartered Bank Kenya, and Diamond Trust Bank Kenya.
The stress test also found that 19 or half of Kenyan banks would be forced to inject Sh220.7 billion in new capital to remain compliant with the minimum statutory requirements if their top three borrowers defaulted.
This means owners of the other 13 banks that have exposure to the top three borrowers would need to inject Sh30.3 billion in new capital to be compliant. Of the 13 banks, four are mid-sized banks, while nine are small lenders.
The CBK dictates that a bank cannot lend more than 25 percent of its core capital to a single borrower. Total borrowings by the top three clients can, however, surpass this limit, with the failure of the stress test showing that most of the banks' lending is heavily concentrated.
The top borrowers across the industry are involved in transport, energy, real estate, and manufacturing sectors.
Large banks pride themselves on having huge balance sheets that allow them to give big-ticket loans, which previously were booked by international banks riding on the size of their parent companies.
Banks prefer lending to corporates due to the huge fees raked in executing the large transactions. Corporate customers also hold quality assets which are attached as security for the loans.
However, corporate customers have recently become a pain to banks as tough economic times pushed some to default, making them the largest contributors to the industry’s non-performing loans. They have proven to be aggressive fighters in courts when banks have sought to auction assets used as security.
“Corporate loans are a pain, but it is just a timing difference. We have a couple of loans we are unable to recoup, and each time they go to court, we have to make full provision. But corporate loans are fully secured, and it is just a matter of time,” said Equity Bank chief executive James Mwangi in May during an investor briefing.
Equity Bank seized East African Cables and its parent company Transcentury in June following their defaulting on a Sh4.74 billion loan. The two companies had put up a two-year-long court battle, underscoring how difficult it is to collect from a distressed corporate borrower.
Large firms that have defaulted on their loans, with their battles with banks coming to the limelight, include Multiple Hauliers for Sh7.2 billion borrowed from NCBA Bank, Proctor & Allan (E.A) (Sh4.9 billion from KCB Bank Kenya), and Convex Commercial Logistics (Sh2.07 billion from Stanbic Bank).
Banks treasure corporate customers because they offer diverse revenue streams, large deposits, and are regarded as a stamp of stability.
Large firms have a preference for tier one banks, which can meet their needs and are perceived to be more stable than their smaller peers.
Small balance sheets of tier three lenders limit their ability to extend large-ticket loans. Notably, nine commercial banks were already in breach of the single obligor rule as at the end of December 2024, indicating that a default by a single borrower would force them to inject additional capital.
The CBK urged banks to study the business model of each of their top borrowers to ensure they understood all risks associated with the industry in which they operate.
Following increased monitoring by the regulator, two of the large banks passed the test this year, having failed the same test last year. This saw the volume of exposure faced by the large banks drop by Sh23.7 billion from Sh213.7 billion the previous year.
