A report by Moody’s Investors Service dubbed “Banking System Brief: Kenya” indicates that Kenya’s economic recovery will support banks’ profitability at current levels and lead to a peak in problem loans, although asset risks will remain high. At the same time, banks’ strong capital levels and deposit-funded profiles will continue to provide resilience.
“Operating conditions are improving in Kenya, with real GDP growth forecast to rise to 5.6% this year as business confidence returns and agriculture recovers following last year’s drought,” notes Christos Theofilou, Senior Analyst at Moody’s.
“We expect credit growth to also rebound, but remain low due to tighter bank lending criteria.”
The report goes on to say that, as well as having a resilient and relatively well diversified economy that is growing faster than the sub-Saharan African average, Kenya also benefits from financial technology innovation, a large young population, productivity improvements from recent infrastructure investments, and a gradual exploitation of oil and gas reserves.
Moody’s expects private-sector credit growth to remain below 5% during 2018. While Kenya’s economic rebound will help banks to expand loan growth over the next 12-18 months, it currently remains constrained by a government cap on their lending rates. Accordingly, Kenyan banks’ sovereign exposure will remain high over the coming quarters, given the sovereign’s strong appetite for debt and sluggish private-sector loan growth.
At the end of last year, non-performing loans reached 10.1% of total loans, up from 6.0% at the end of 2015. Moody’s estimates that problem loans have increased close to 11% of loans as of March 2018. Problem loans may rise further due to the delayed impact of challenges last year but they will peak during 2018 as the economy improves and as banks step up their loan-loss recovery efforts.
Kenyan banks’ profitability is one of the highest regionally and globally, providing a strong recurring buffer against high asset risk.
Moody’s expects the banks to maintain an average Return on Assets close to 3.2%. Kenyan banks have increasing transactions through digital platforms, including loans, and we expect digitization to continue to fuel Kenyan banks’ growth and support their operational efficiency. The rating agency also expects Kenyan banks to maintain their capital buffers and deposit-funded profile – key credit strengths – over the next 12-18 months.
