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Moody’s Changes Outlooks of Three Kenyan Banks to Negative

Moody’s Investors Service,has affirmed all ratings and assessments of the three rated Kenyan banks: KCB Bank Kenya, Equity Bank and Co-operative Bank of Kenya. As part of the same rating action Moody’s has changed the outlook on the banks’ long-term deposit ratings to negative from stable.

The rating action follows Moody’s decision to affirm Kenya’s B2 government rating and change its outlook to negative from stable on 7 May 2020. The negative outlook on the sovereign reflects the rising financing risks posed by Kenya’s large gross borrowing requirements at a time when the fiscal outlook is deteriorating. For further information on the sovereign rating action, please refer to Moody’s press release: Moody’s changes outlook on Kenya’s rating to negative from stable; affirms the B2 rating.

The affirmation of the three Kenyan banks’ ratings reflects their resilient financial profiles despite the increasingly challenging operating environment thanks, in varying degrees, to their deposit-funded profiles, strong liquid assets and high profitability.

The negative outlook reflects primarily the banks’ sizable holding of sovereign debt securities at between 1.3-2.0 times their shareholders’ equity which links their creditworthiness to that of the government. All three banks’ local-currency deposit ratings of B2 are at the same rating level of the government, and a potential weakening in the government’s credit profile will lead to a weaker credit profile for the banks.

To a lesser degree, the negative outlook also captures the higher risks to the banks’ asset quality and profitability over the next 12-18 months, amid the coronavirus-induced economic slowdown. Moody’s expects slower economic activity amid the coronavirus-induced disruption, with growth slowing to 1% in 2020, from 5.4% in 2019 and well below the five-year average of 5.6%.

The affirmation of KCB Bank’s ratings reflects the bank’s solid profitability metrics, with a net income to tangible assets of 3.4% in 2019, a stable deposit-based funding structure supported by a strong domestic franchise, and solid capital metrics with a tangible common equity to assets ratio of 13.1% by year-end 2019. These strengths are balanced against elevated asset risks, with high nonperforming loans of 6.5% of gross loans as of year-end 2019. The primary driver for KCB Bank’s negative outlook is the bank’s sizable holding of sovereign debt securities which links its creditworthiness to that of the government.

Equity Bank’s ratings captures the bank’s strong brand recognition, established domestic franchise and extensive use of alternative distribution channels, which support high and resilient profitability with net income at 3.7% of tangible assets during 2019. The affirmation also captures the bank’s solid liquidity buffers, with a liquid banking assets-to-tangible banking assets ratio of 39% as of year-end 2019, and resilient funding profile, with a granular retail depositor base.

On Co-op Bank’s ratings, Moody’s says it reflects the bank’s established domestic franchise, growing use of alternative distribution channels, and improving operational efficiency, all of which support profitability with net income at 3.1% of tangible assets; improving funding profile that benefits from a diversified depositor base; and strong capital levels with a tangible common equity-to-risk weighted assets ratio of 14.2% as of year-end 2019. These strengths are balanced by elevated asset risks, with reported nonperforming loans at 9.9% of gross loans and a fairly low IFRS provisioning coverage at 52% of nonperforming loans as of year-end 2019.

Overally, Moody’s says to a lesser degree, the negative outlook also captures the higher risks to the bank’s asset quality and profitability due to a more fragile economic environment which will translate in reduced business activity, fewer fee-generating transactions and the higher cost of credit.