New warning over Kenya’s high bank default rates

The 10 Kenyan-listed banks set aside an extra Sh46.6 billion in the year ended December.

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A second global ratings agency has retained its outlook on Kenya’s banks at ‘B’ with a negative outlook, citing the high volumes of Non-Performing Loans (NPLs).

A 'B' rating is considered highly speculative. This means that although the issuer can meet their financial obligations, they are also vulnerable to adverse economic shocks.

Fitch Ratings Limited said the country’s banking sector has high exposure to public sector debt arrears due to delayed government payments to contractors.

“Loan quality has been affected by the public sector arrears, where delayed government payments to contractors have forced them to run overdue on existing loans to local banks. As a result, the sector regulatory NPL ratio increased by 170 basis points in the first nine months of 2023 to reach 15 percent at the end third quarter of 2023,” said Fitch in its analysis.

“The most affected sectors were manufacturing and building and construction, where the absolute amount of NPLs increased by 50 percent in the first nine months of 2023” it added.

This comes barely two weeks after another global ratings agency, Moodys issued a similar warning and revised its outlook on Kenya’s lenders to negative from stable, citing concerns about high volumes of non-performing loans despite solid profitability and liquidity levels.

“Despite solid economic growth, an array of challenges will weigh on borrowers' creditworthiness and create difficult operating conditions for banks through 2024,” said Moody’s in its analysis.

“These challenges for borrowers encompass rising interest rates, increased taxes, reduced government spending, high inflation, foreign-currency shortages and government delays in settling outstanding bills. Consequently, problem loans will rise,” it added.

The volume of NPLs in the local banking sector rose by Sh133.6 billion to Sh621.3 billion in the 12 months to December 2023, accounting for 14.8 percent of the sector’s loan book compared to 13.3 percent in 2022.

Fitch expects retail loans to be significantly impacted by the decline in real disposable incomes as a result of the recent tax increases by the government. It is also feared that continuing depreciation of the shilling would bolster inflation and exert additional pressure on borrowers’ repayment capacity.

Fitch, however, expects the Kenyan banking sector’s strong profitability and reasonable capital buffers to weather moderate asset quality deterioration in 2024, and provide room for healthy loan growth.

The agency rates three Kenyan banks— KCB Group Plc, NCBA Group Plc and I&M Group Plc—, their local banking subsidiaries, and Stanbic Bank Kenya Ltd at the level of Kenya’s ‘B’ Long-Term Issuer Default Rating.

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