Bad bank loans could still increase, warns Moody's

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Non-performing debts have risen sharply in the past two years from 6pc to 10pc.

Bad debts in commercial banks are likely to rise in the course of this year as the delayed impact of the multiple shocks of last year begins to be felt, rating agency Moody’s has said.

Nonperforming loans (NPLs), already at 10.1 per cent, could hit a peak this year with the Moody’s estimating that they rose to 11 per cent by the end of the first quarter of the year.

However, the rating agency sees banks intensifying recovery efforts as the economy improves.

“Moody's estimates that problem loans have increased close to 11 per cent of loans as of March 2018. Problem loans may rise further due to the delayed impact of challenges last year but they will peak during 2018 as the economy improves and as banks step up their loan-loss recovery efforts,” the agency said.

NPLs have risen rapidly in the past two years, having stood at six per cent in 2015. Kenya faced drought and two presidential elections last year as well as increased spending on food.

“By the end of 2017, problem loans (excluding interest in suspense) reached 10.1 per cent of total loans, up from 6.0 per cent at the end of 2015,” Moody's added.

But even as the economy improves, the agency does not see credit expansion recovering to pre-crisis levels when it stood well over 10 per cent year-on-year.

"Operating conditions are improving in Kenya, with real GDP growth forecast to rise to 5.6 per cent this year as business confidence returns and agriculture recovers following last year's drought," said Christos Theofilou, a Moody's vice president and senior analyst.

READ: Non-performing loans in local banks hit 10-year high

"We expect credit growth to also rebound, but remain low due to tighter bank lending criteria."

“Moody's expects private-sector credit growth to remain below five per cent during 2018. While Kenya's economic rebound will help banks to expand loan growth over the next 12-18 months, it currently remains constrained by a government cap on their lending rates,” Moody’s added.

The rating agency said that apart from a resilient and diversified economy that is growing faster than the sub-Saharan Africa average, Kenya is benefiting from financial technology innovation, a large and young population as well as productivity improvements resulting from investment in infrastructure.