By JAMES ANYANZWA

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Kenyan banks’ credit ratings are in danger of a possible downgrade due to their high appetite for lending to a government staggering on the brink of a debt distress.

Global rating agency Moody’s Investor Service said Kenyan lenders are heavily exposed to the government through substantial investment in treasury bills and bonds thereby linking their credit profiles to that of the Government of Kenya which at the moment is rated B2 Negative.

The agency through a brief on the Kenyan banking sector dated September 2020 said all the three rated banks’ local currency deposit ratings — KCB, Equity and Co-operative Bank — are aligned with the government’s issuer rating.

According to Moody’s government bonds accounted for 37 percent of Kenyan banks assets last year and this sovereign exposure is likely to increase from these levels over the next 12 to 18 months.

“We expect Kenyan banks to maintain their strong liquidity buffers over the next 12 to 18 months, primarily in the form of government securities,” said Moody’s.

“Banks will likely continue to invest heavily in government securities due to both high supply and demand, particular as loan growth will be sluggish. Banks will likely continue to invest heavily in government securities as under current conditions they will take a more cautious approach holding extra liquidity and as both lending demand and loan supply are sapped by the coronavirus-related economic disruption.”

“Black swan” event

On the other hand, the government will continue relying on domestic refinancing of its debt.

Higher coronavirus-related expenses and lower revenue amid lower economic growth and tax cuts will raise the fiscal deficit to over eight per cent of gross domestic product over the next two years.

This year, Moody’s and its counterparts Standard and Poor’s and Fitch rating agencies have so far downgraded Kenya’s sovereign credit outlook to ‘negative’ from ‘stable’, citing the country’s rising risks to meet its borrowing requirements and debt payments and stalled economic growth due to the Covid-19 Pandemic.

Stricken borrowers

It is argued that a sharp coronavirus-related economic slowdown in Kenya will weaken banks’ loan quality and profits but strong capital and liquidity and government support measures will provide financial resilience.

The Covid-19 pandemic, which could be regarded as a typical “black swan” event has sent alarm bells ringing for both bank shareholders and the banking regulator going by the quarterly performances of various lenders.

It is argued that the global nature and magnitude of the pandemic is most likely going to receive attention from the global banking stability body — the Basel Committee on Banking Supervision — a consortium of central banks that established a global accord designed to improve the regulation, supervision, and risk management within the banking sector.

Covid-19 has severely tested and exposed the resilience and sustainability of the different business models operated by Kenyan banks.

Further, the level of Covid-19-related provisioning that banks have had to do to offer relief to their stricken borrowers has also exposed put under test the effectiveness of existing credit risk analysis tools.

Normally, such shocks always lead to tightening of controls, with adverse effects on access on credit and financial inclusion.

Absa Kenya and KCB saw their net profit for the nine months to September 30 decline by 65 percent and 43 per cent respectively.

On the other hand, the net earnings for I&M bank, Standard Chartered Bank (Kenya) and Equity Bank fell by 31 percent, 30 percent and 14 percent.

Co-operative Bank recorded a modest profit decline of 10 per cent compared to its peers largely due to the lender’s outsized customer focus on consumer lending, especially public sector payrolls that continue to enjoy full incomes despite the pandemic.

In addition, the bank’s significant lending exposure to its strategic market segment —the Savings and Credit Co-operatives (Saccos) majority of whom draw their membership from ‘permanent-and-pensionable’ civil servants and related public sector payrolls, has ensured that loan repayments are honoured with minimal defaults.

During the year to September 2020, holdings of government debt by Ugandan commercial banks picked up, growing by 24.7 percent and driving the growth in total assets of 19 per cent.

Relative to their total assets, banks’ exposure to domestic government debt has been rising, and on aggregate, commercial banks hold about 40 percent of the government domestic debt, according to the Bank of Uganda Quarterly Financial Review report dated September 2020.

The increased investment in government debt by banks partly reflects risk-aversion on concerns about asset quality in the Covid-19 period.