Kenyan Banks' Credit Ratings at Risk of Downgrade

Strategic Insights -

Kenyan banks' heavy investment in government debt and reliance on treasury bills and bonds threatens their credit ratings, prompting Moody's to warn of a possible downgrade. As the government's debt distress deepens, banks are exposed to a greater risk of default, impacting their liquidity buffers and profitability. Moody's report, dated September 2020, highlights that government bonds accounted for 37% of Kenyan banks' assets in 2020, with this exposure expected to increase over the next 12-18 months.

Key Takeaways:

  • Kenyan banks' credit ratings are linked to the government's issuer rating, which is currently B2 Negative.
  • Government bonds accounted for 37% of Kenyan banks' assets in 2020, with exposure expected to increase over the next 12-18 months.
  • Banks are expected to maintain strong liquidity buffers, primarily in the form of government securities, over the next 12-18 months.
  • The government will continue to rely on domestic refinancing of its debt, with the fiscal deficit expected to rise to over 8% of GDP over the next two years.
  • Standard and Poor's and Fitch rating agencies have also downgraded Kenya's sovereign credit outlook to 'negative' from 'stable', citing rising risks to meet borrowing requirements and debt payments.
  • A sharp economic slowdown in Kenya due to the COVID-19 pandemic has weakened banks' loan quality and profits.
  • Strong capital and liquidity, as well as government support measures, have provided financial resilience to banks, but credit risk analysis tools have been exposed.
  • The pandemic has led to increased provisioning by banks to offer relief to stricken borrowers, testing the effectiveness of existing credit risk analysis tools.
  • Absa Kenya and KCB saw their net profit decline by 65% and 43% respectively for the nine months to September 30.
  • Other banks showed significant declines in net earnings, with IM bank experiencing a 31% decline and Standard Chartered Bank (Kenya) a 30% decline.

Statistics:

  • Government bonds accounted for 37% of Kenyan banks' assets in 2020 (Moody's).
  • Banks' exposure to domestic government debt is expected to increase over the next 12-18 months (Moody's).
  • The fiscal deficit is expected to rise to over 8% of GDP over the next two years.
  • Standard and Poor's and Fitch rating agencies have downgraded Kenya's sovereign credit outlook to 'negative' from 'stable' (Standard and Poor's, Fitch).
  • Absa Kenya and KCB saw their net profit decline by 65% and 43% respectively for the nine months to September 30 (Moody's).
  • IM bank experienced a 31% decline in net earnings, while Standard Chartered Bank (Kenya) saw a 30% decline (Moody's).
  • Holdings of government debt by Ugandan commercial banks grew by 24.7% and driving the growth in total assets of 19% (Bank of Uganda Quarterly Financial Review report, dated September 2020).

Sources:

  • Moody's Investor Service report on the Kenyan banking sector, dated September 2020.
  • Standard and Poor's rating of Kenya's sovereign credit outlook, dated September 2020.
  • Fitch rating of Kenya's sovereign credit outlook, dated September 2020.
  • Bank of Uganda Quarterly Financial Review report, dated September 2020.