Global ratings agency Moody’s has changed its outlook on the Kenyan banks to negative from stable, citing concerns about high volumes of non-performing loans despite solid profitability and liquidity levels, The volume of non-performing loans in the local banking sector rose by Ksh133.6 billion ($890.7 million) to Ksh621.3 billion ($4.1 billion) in the 12 months to December 2023, accounting for 14.8 percent of the sector’s loan book (2022: 13.3 percent)…
The deterioration of the asset book has reflected the general economic difficulties facing borrowers, including higher interest rates and inflation, piling pending bills and reduced demand for goods and service, “Despite solid economic growth, an array of challenges will weigh on borrowers’ creditworthiness and create difficult operating conditions for banks through 2024,” said Moody’s in its analysis.
“These challenges for borrowers encompass rising interest rates, increased taxes, reduced government spending, high inflation, foreign-currency shortages, and government delays in settling outstanding bills. Consequently, problem loans will rise.” Factors such as the elevated price of goods and services, new statutory deductions including housing levy, and increased interest rates in line with a higher Central Bank Rate (CBR) —now at 13 percent, the highest point in 12 years-have combined to weaken borrowers’ ability to service loans.
Weighted average lending rates for banks stood at 14.63 percent in December —the highest since August 2016 when it averaged 17.66 percent, The Moody’s outlook does not constitute a credit rating action, however, but is instead a view of credit fundamentals in the banking sector over the next 12 to 18 months.
The agency’s concern about the high volumes of NPLs is largely due to the impact this has on the profitability of banks, which are forced to raise their provisioning whenever there is a jump in the stock of bad loans.As a result, Moody’s noted, the return on assets for the sector fell to 3.3 percent in the first nine months of 2023, down from 3.7 percent in 2022.
