Moody’s sounds warning on Kenyan banks' defaults

Global ratings agency Moody’s has changed its outlook on the Kenyan banks to negative from stable, citing concerns about high volumes of non-performing loans despite solid profitability and liquidity levels.

The volume of non-performing loans in the local banking sector rose by Ksh133.6 billion ($890.7 million) to Ksh621.3 billion ($4.1 billion) in the 12 months to December 2023, accounting for 14.8 percent of the sector’s loan book (2022: 13.3 percent).

The deterioration of the asset book has reflected the general economic difficulties facing borrowers, including higher interest rates and inflation, piling pending bills and reduced demand for goods and services.

“Despite solid economic growth, an array of challenges will weigh on borrowers' creditworthiness and create difficult operating conditions for banks through 2024,” said Moody’s in its analysis.

“These challenges for borrowers encompass rising interest rates, increased taxes, reduced government spending, high inflation, foreign-currency shortages, and government delays in settling outstanding bills. Consequently, problem loans will rise.”

Factors such as the elevated price of goods and services, new statutory deductions including housing levy, and increased interest rates in line with a higher Central Bank Rate (CBR) —now at 13 percent, the highest point in 12 years—have combined to weaken borrowers’ ability to service loans.

Weighted average lending rates for banks stood at 14.63 percent in December —the highest since August 2016 when it averaged 17.66 percent.

The Moody’s outlook does not constitute a credit rating action, however, but is instead a view of credit fundamentals in the banking sector over the next 12 to 18 months.

The agency’s concern about the high volumes of NPLs is largely due to the impact this has on the profitability of banks, which are forced to raise their provisioning whenever there is a jump in the stock of bad loans.

As a result, Moody’s noted, the return on assets for the sector fell to 3.3 percent in the first nine months of 2023, down from 3.7 percent in 2022.

The agency further noted that even though interest income is expected to go up due to higher yields on loans and government bonds following interest rate hikes and approvals for risk-based loan pricing plans for most banks, headwinds from the provisioning and higher cost of funds will keep a lid on profits.

“Several counterbalancing factors will keep overall profitability stable this year. These include the need for high loan loss provisioning and the escalating cost of deposits,” said Moody’s.

Disclosures made by the National Treasury in a prospectus for the just concluded Eurobond sale show that the banking sector’s unaudited net profits fell to Ksh172.9 billion in 2023 from Ksh175.5 billion in 2022.

The rare Ksh2.6 billion or 1.5 percent drop was in contrast with the performance in 2022 when the lenders’ net profit jumped by 22.5 percent from Ksh143.3 billion in 2021.

The only recent years in which the sector returned a drop in profits was in 2017 after the enactment of the interest rate capping law hit interest income, and in 2020 when Covid-19 disrupted businesses. On both occasions, profits rebounded within a year.