Banks exposed to public debt pile, Moody’s warns

Kenyan banks have one of the highest ratios of government debt holdings to capital in Africa, heightening their exposure to sovereign lending risk compared to peers as well as inflating profitability.

A new report on African banks by ratings agency Moody’s says the exposure means their credit profiles are tightly linked to that of the government, which has a direct impact on creditworthiness irrespective of their financial performance.

Kenyan banks’ government exposure as a percentage of equity stands at 374 percent (nearly five times) second only to Egypt’s 561 percent among Africa’s major economies.

Banks have in the last two years been ramping up bonds in reaction to the capping of interest rates on customer loan at four per cent above the prevailing Central Bank Rate.

“Banks’ exposure to their respective government securities is typically about 1.5 times their equity, but rising to over two times equity when adding loans to the government and state-owned entities. This leaves their credit profiles vulnerable to sovereign risk,” says Moody’s in the report.

“We expect high exposure to be maintained in light of ongoing high fiscal deficits that — to a large extent — are financed by local banks,” says Moody’s, adding that over 90 percent of recent rating actions have been driven by sovereign actions.

Central Bank of Kenya data shows as at mid this month, commercial banks held 54.2 percent or Sh1.38 trillion of the government’s domestic debt, an increase of 40 percent from Sh990 billion in August 2016 when the rate cap came into effect.

Although government debt is generally considered the lowest risk investment that a company can make, there have been concerns in some African countries about sustainability of public debt, although this has tended to be more on the external borrowing side.