COVID-19 continues to be a threat to humanity, as the number of the infected increases and a cure remains elusive. Kenya has not been left unscathed as the pandemic is taking its toll on the economy.
According to Moody’s, a credit rating agency, the rapid and widening spread of COVID-19 is creating a severe and extensive credit shock across many regions and markets. As a result, Kenya is at risk due to its high debt and interest burdens, which will worsen with larger fiscal deficits and weaker growth.
Due to this, in addition to the rising financing risks posed by Kenya’s large gross borrowing requirements, Moody’s shifted Kenya’s rating from stable to negative and forecast that its economy will slow down from 5.4% in 2019 to 1%, 2020. In addition, the rating agency also changed the long-term deposit ratings of the three top retail banks in the country; KCB Bank, Equity Bank, and Co-operative Bank of Kenya Limited from stable to negative.
The rating of the three banks is based on the financial profiles, high profitability, and strong liquid assets. The shift to negative has been mainly as a result of the banks’ sizable holding of sovereign debt securities at between 1.3 and 2.0 times their shareholders’ equity, which links their creditworthiness to that of the government, according to Moody’s. Interconnected on the same rating as a result of investing largely in government securities means that weakening the credit of the government will affect the banks the same way.
As for KCB Bank, the largest bank by asset base with total assets valued at Sh899 billion, the shift reflects the bank’s solid profitability, with the net income to tangible assets at 3.4% in 2019, a stable deposit-based funding structure and solid capital metrics with a tangible common equity to assets ratio of 13.1% by year-end 2019. However, despite these strengths, the bank is balanced out due to its high non-performing loans of 6.5% of gross loans in same period.
In the case of Co-operative Bank of Kenya Limited, which has assets valued at Sh457 billion after its acquisition of Jamii Bora Bank, the bank demonstrated solid profitability as well with a net income at 3.1% of tangible assets. The profitability was achieved through increased use of alternative distribution channels, improving efficiency and establishing a domestic franchise.
It also reflected an improving funding profile, 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 cancelled out by 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.
Equity bank, which has a total asset value of Sh638.6 billion, on the other hand, has a high profitability with net income at 3.7% of tangible assets due to a strong brand recognition and extensive use of alternative distribution channels. Also, it reflects the banks solid liquidity buffers, with a liquid banking assets-to-tangible banking assets ratio of 39% as of year-end 2019. All this is balanced out by high nonperforming loans of 7.8% of gross loans as of year-end 2019.
According to the agency, the ratings are able to upgrade or downgrade depending on the rating of the sovereign. Ratings for the three banks could also change if Moody’s expects Kenya’s operating environment to weaken further beyond the thresholds assumed by the current rating level. It is clear that time will play a major role, as the future rating of the Kenyan economy and the three banks depends on how long the pandemic will last before a cure becomes a reality.