Moody’s rating agency has altered its assessment of KCB, Equity and Co-operative, Kenya’s three largest retail banks’ long term deposit ratings to negative from stable.
This action follows Moody’s recent decision to also downgrade the Kenyan economy’s long term outlook from stable to negative.
The negative outlook of the three Kenyan banks reflects primarily the banks’ huge holding of sovereign debt securities at between 1.3 and 2 times their shareholders’equity, which links their creditworthiness to that of the Kenya Government.
Moody’s says any potential weakening in the Kenya Government’s credit profile will also lead to a weaker credit profile for these banks. The negative outlook also captures the higher risks to the banks’ asset quality and profitability over the next 12-18 months, amid the coronavirus-induced economic slowdown.
Moody’s projects Kenya’s economic growth to slow down to 1% in 2020 from 5.4% in 2019, well below the five-year average of 5.6%. The rating service observes that how deep the financial metrics of these three banks will be hit will depend on length of the COVID-19 pandemic.
The primary driver of KCB’s negative outlook is the bank’s sizeable holding of sovereign debt securities, which links its creditworthiness to that of the government. KCB’s own creditworthiness is exposed to the sovereign through Government Securities at 1.3 times its total shareholders’s equity as at end of 2019 financial year.
An economic slowdown due to the global pandemic is also expected to cause fewer fee-generating transactions and translate to higher cost of credit.
Similarly, Equity Bank is equally exposed to the sovereign bond through its holding of Government securities that is twice its total shareholders equity, or what owners of the bank are to be paid was the bank to be liquidated.
The primary driver for Co-op Bank’s negative outlook is also based on its sizable holding of sovereign debt securities, the same position as that of KCB and Equity. Co-op Bank’s has high direct exposures to the sovereign through government securities at 1.5 times its total shareholders’ equity as of the end of the 2019 financial year.
Moody’s negative outlook of these three banks could change back to stable only if the sovereign rating outlook is also changed back in that direction.
Alternatively, the ratings could be downgraded further to junk if the sovereign rating is downgraded, given the banks’ sizeable holdings of sovereign debt securities.
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.