June 7, 2017 / 3:58 PM / 7 months ago

Fitch: Tough Times for Kenyan Banks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Kenyan Banks: Peer Review here LONDON, June 07 (Fitch) Fitch Ratings says in a peer review that Kenyan banks are facing tough times as macro stress and government intervention strike. The 11 major banks covered in the review account for 85% of domestic banking assets. "Our outlook for the sector in 2017 is negative, as banks grapple with macro risks and government intervention to reduce loan rates" says Mahin Dissanayake, Country Director for Kenyan banks. Kenya is rated 'B+' with a Negative Outlook and the banks' operating environment is sensitive to slowing public spending, adverse weather conditions, rising inflation, political risk and external factors. "We see no easing of these risks for the banks in the near term." To make matters worse, In September 2016, Kenya introduced a cap on lending rates at 400bps above the prevailing central bank rate (CBR - currently at 10%). It also set a floor on deposit rates at 70% of the CBR. The aim was to bring down the cost of credit for the private sector and increase financial inclusion. However, this move has been hugely negative for the banking sector which by 1Q17 saw a significant hit on profitability. The cap on lending rates also led to a further slowdown in credit as banks have been reluctant to lend and have tightened underwriting standards due to their inability to price risk. While the large banks and some medium size banks are less affected, we believe the small banks struggle due to their niche, high risk/high return business models being challenged. In our view this raises systemic risk at a time when the sector has come under increased scrutiny following three banks being put in receivership by the central bank. Sector asset quality, has been weakening since 2015 due to the banks' sensitivity to concentration risk by both industry and borrower, with the average sector NPL ratio reaching 10% at end-2016 (up from 6.3% at end-2015). We expect the reduction in bank supply of credit, particularly to SMEs, to exacerbate the problem as some borrowers are unable to refinance. The floor on deposit rates has increased the cost of funding, but the impact on operating profitability was not as severe as the cap on lending rates. Banks, where possible, have shifted deposits into non-interest bearing deposits. We believe the small banks are most affected as they are more reliant on high interest deposits for their funding due to the lack of franchise. The small banks have already been affected by liquidity pressure due to a 'flight to quality' and the deposit rate cap will exacerbate the problem, in our view. In Fitch's view the banks in this review are adequately capitalised, with capital ratios comfortably above the regulatory minimum. High capital ratios are prudent as the operating environment can be volatile and challenging. Capital ratios have been supported by solid earnings but this is reducing due to the cap on lending rates. Access to capital is good, particularly by emerging market standards, with Kenya having developed financial markets. While bank risks are rising, regulation and supervision are improving. The central bank was quick to intervene with the three problem banks and prevented wider sector instability. Fitch's report, is available on www.fitchratings.com or by clicking the link above. Contact: Mahin Dissanayake Director +44 20 3530 1618 Fitch Ratings Limited 30 North Collonade London E14 5GN Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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