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 […]