Fitch Ratings has revised the Outlook on KCB Group from stable to negative due to the expected impact of coronavirus. The American rating agency says there is a limited probability that the lender could receive any support from the state if required.
Fitch’s assessment of KCB group mentions that the lender is faced with a challenging operating environment and weak asset quality.
KCB Group’s asset quality weakened following the consolidation of National Bank of Kenya’s problem loan book, as highlighted by a 300bp increase in its impaired loans in 2019.
The acquisition has had a modest impact on KCB Group with impaired loans net of specific provisions remaining high.
KCB Group is the largest banking group in East Africa and commands leading market shares of loans (17%) and customer deposits (15%) in its core market of Kenya through its two banking subsidiaries, KCB Bank and National Bank of Kenya Limited (NBK).
NBK was acquired in October 2019. KCB Bank has the largest retail footprint in Kenya and strong relationships with the government and state-owned entities, further Fitch’s view of a strong franchise.
KCB Group has operations in 6 other countries within the East Africa region, but these represent a small proportion of consolidated assets and earnings.
Fitch has a positive view of management quality and corporate governance.
Fitch forecasts Kenya’s GDP growth to slow to 1% in 2020, followed by 4% growth in 2021, but with material downside risk for 2020 growth depending on the extent and duration of the coronavirus pandemic and the consequent lockdown measures.
The economic fallout from the pandemic will cause a shock to Kenya’s near-term growth with negative implications for corporate balance sheets and households’ financial standing and, ultimately, for the banking sector’s asset quality and profitability metrics.
In addition, loans to the agricultural and trade sectors are expected to weaken further due to an unprecedented locust invasion, which has been ongoing since early 2020.
While KCB Group delivers strong profitability metrics, Fitch expects to see pressure on profitability metrics as a result of increased loan-impairment charges, moratoriums on capital and interest payments for borrowers, and a period of lower interest rates.