Global rating agency Moody’s review of 12 markets shows Kenyan lenders are the second most exposed to the government with almost 300 per cent of their equity lent out to the State. However, Egyptian banks are even more exposed on lending Cairo 603 per cent of their equity.
The fortunes of the banks are consequently tied to governments, with Moody’s adjusting views on banks depending on the sovereigns.
“Banks will maintain high government exposure because they are the main financiers of wide fiscal deficits,” Moody’s said in the year 2020 outlook.
“The bulk of our recent African bank rating actions has followed sovereign rating actions despite banks’ financial performance remaining generally resilient. This reflects the aforementioned large sovereign exposure,” the agency said.
In Kenya, banks have been preferring the lending government to risky borrowers, flooding Treasury bill and bond auctions.
The rate cap ushered in three years of cheap credit for the government in the domestic market that saw the Treasury ramp up domestic borrowing from Sh1.8 trillion in June 2016 to Sh2.9 trillion in this year.
Banks are now reducing exposure to the government following the repeal of the cap in November, where the government has offered to procure Sh96 billion debt but has only got banks to bid half, Sh48.7 billion, over the last four weeks.
A recent Sh50 billion ten-year bond received Sh38 billion, prompting the central bank to reduce the current five-year bond to only Sh25 billion.
Analysts say there is pressure for banks not to cut out the government, which will have the effect of driving rates up if the Treasury becomes desperate.
Moody’s said besides banks being exposed to country ratings, their customers are also exposed to late payments by State a double edge sword that may make more loans toxic.
“Problem loans will remain high given an accumulation of payment arrears, and problems at select large corporates,” the agency said.
Moody’s expects loan growth to accelerate, following the repeal of interest-rate caps on bank lending which will support banks’ earnings-generating capacity.
The ratings agency also sees banks will maintain strong capital buffers, high liquidity — especially in local currency — and a stable, deposit-based funding structure.