Risk ratings of three top lenders dip

Global credit ratings agency Moody’s has announced a change in its outlook on three Kenyans banks from stable to negative

The agency says this rating came after confirming the Government of Kenya’s B3 long-term issuer and senior unsecured ratings.

The change in outlook is on Equity Bank’s and Co-op Bank’s long-term deposit ratings, as well as on KCB Bank’s long-term deposit and issuer rating, citing downside risks related to liquidity risk and elevated refinancing needs against limited external financing options, saying the government’s reliance on expensive domestic financing to cover the fiscal deficit has contributed to the negative outlook.

“This link between the sovereign and the banks’ credit profiles is significant because the rated banks hold substantial amounts of government debt securities, which are multiples of their tangible common equity,” Moody’s said.

The confirmation of the Kenyan banks’ long-term ratings comes amidst the easing of intense liquidity pressure on the sovereign experienced earlier in the year.

In the case of KCB Bank, its long-term ratings have been confirmed, reflecting its strong deposit-funded profile, extensive distribution network, and established domestic franchise, leading to strong profitability.
“However, the negative outlook on KCB Bank’s long-term deposit and issuer ratings takes into account the bank’s substantial holding of sovereign debt securities, which ties its creditworthiness to that of the Government of Kenya,” the agency reported on Tuesday.

Additionally, high asset risks, particularly nonperforming loans and a drop in regulatory capital levels, are also contributing factors to the negative outlook.

Equity Bank’s long-term ratings have also been confirmed due to its strong brand recognition, extensive domestic franchise, and robust alternative distribution channels, resulting in solid profitability.

Yet, the negative outlook is attributed to the bank’s significant exposure to sovereign debt securities and the risks associated with higher inflation and lending rates, as well as a depreciation of the Kenyan Shilling against the US dollar.

Co-op Bank’s long-term ratings confirmation stems from its established franchise and ongoing transformation strategy, which support solid profitability, along with improved funding, liquidity, and capital levels.

However, the negative outlook on Co-op Bank’s long-term deposit ratings reflects its sizable holding of sovereign debt securities and the risks arising from higher inflation, lending rates, and tighter government spending.