![[Kenya] Moody's downgrades KCB, Equity and Cooperative banks ratings to negative](Images/Key Logos/KCB.jpg)
[Kenya] Moody's downgrades KCB, Equity and Cooperative banks ratings to negative
Moody's Investors Service, has changed the outlook of KCB Bank Kenya Limited, Equity Bank and Co-operative Bank of Kenya Limited long-term deposit ratings to negative from stable.
The rating action follows the recent decision to affirm Kenya's B2 government rating and change its outlook to negative from stable on 7 May 2020. The negative outlook on the sovereign reflects the rising financing risks posed by Kenya's large gross borrowing requirements at a time when the fiscal outlook is deteriorating.
The affirmation of the three Kenyan banks' ratings reflects their resilient financial profiles despite the increasingly challenging operating environment thanks, in varying degrees, to their deposit-funded profiles, strong liquid assets and high profitability.
The negative outlook reflects primarily the banks' sizable holding of sovereign debt securities at between 1.3- 2.0 times their shareholders' equity which links their creditworthiness to that of the government.
All three banks' local-currency deposit ratings of B2 are at the same rating level of the government, and a potential weakening in the government's credit profile will lead to a weaker credit profile for the banks.
To a lesser degree, 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 expects slower economic activity amid the coronavirus-induced disruption, with growth slowing to 1 per cent in 2020, from 5.4 per cent in 2019 and well below the five-year average of 5.6 per cent.
A greater visibility over the depth and length of the current crisis will be necessary in order to fully quantify the impact on banks' financial metrics, and whether the impact means that banks' credit profiles are no longer consistent with their current standalone credit assessments.
The affirmation of KCB Bank's ratings reflects the bank's solid profitability metrics, with a net income to tangible assets of 3.4% in 2019, a stable deposit-based funding structure supported by a strong domestic franchise, and solid capital metrics with a tangible common equity to assets ratio of 13.1% by year-end 2019. These strengths are balanced against elevated asset risks, with high nonperforming loans of 6.5% of gross loans as of year-end 2019.
The primary driver for KCB Bank's negative outlook is the bank's sizable holding of sovereign debt securities which links its creditworthiness to that of the government. KCB Bank's B2 local-currency deposit rating, reflects its b2 Baseline Credit Assessment (BCA), which is at the same level as Kenya's B2 sovereign rating.
Any potential weakening in the creditworthiness of the sovereign, will also weaken KCB Bank's own creditworthiness given the bank's high direct exposures to the sovereign through government securities at 1.3 times its total shareholders' equity as of year-end 2019.
To a lesser degree, the negative outlook also captures the higher risks to the bank's asset quality and profitability due to a more fragile economic environment which will translate in reduced business activity, fewer fee-generating transactions and the higher cost of credit.
The affirmation of Equity Bank's ratings captures the bank's strong brand recognition, established domestic franchise and extensive use of alternative distribution channels, which support high and resilient profitability with net income at 3.7% of tangible assets during 2019.
The affirmation also captures the bank's solid liquidity buffers, with a liquid banking assets-to-tangible banking assets ratio of 39% as of year-end 2019, and resilient funding profile, with a granular retail depositor base. These strengths are balanced against the elevated asset risks, with high nonperforming loans of 7.8% of gross loans as of year-end 2019.
The primary driver for Equity Bank's negative outlook is the bank's sizable holding of sovereign debt securities which links its creditworthiness to that of the government. Equity Bank's B2 local-currency deposit rating, reflects its b2 BCA, which is at the same level as Kenya's B2 sovereign rating.
Any potential weakening in the creditworthiness of the sovereign, will also weaken Equity Bank's own creditworthiness given the bank's high direct exposures to the sovereign through government securities at 2.0 times its total shareholders' equity as of year-end 2019.
To a lesser degree, the negative outlook also captures the higher risks to the bank's asset quality and profitability due to a more fragile economic environment which will translate in reduced business activity, fewer fee-generating transactions and the higher cost of credit.
The affirmation of Co-op Bank's ratings reflects the bank's established domestic franchise, growing use of alternative distribution channels, and improving operational efficiency, all of which support profitability with net income at 3.1% of tangible assets; improving funding profile that benefits from a diversified depositor base; and strong capital levels with a tangible common equity-to-risk weighted assets ratio of 14.2% as of year-end 2019.
These strengths are balanced by elevated asset risks, with reported nonperforming loans at 9.9% of gross loans and a fairly low IFRS provisioning coverage at 52% of nonperforming loans as of year-end 2019. The primary driver for Co-op Bank's negative outlook is the bank's sizable holding of sovereign debt securities which links its creditworthiness to that of the government.
Co-op Bank's B2 local-currency deposit rating, reflects its b2 BCA, which is at the same level as Kenya's B2 sovereign rating. Any potential weakening in the creditworthiness of the sovereign, will also weaken Co-op Bank's own creditworthiness given the bank's high direct exposures to the sovereign through government securities at 1.5 times its total shareholders' equity as of year-end 2019.
To a lesser degree, the negative outlook also captures the higher risks to the bank's asset quality and profitability due to a more fragile economic environment which will translate in reduced business activity, fewer fee-generating transactions and the higher cost of credit.
