Going into the COVID-19 pandemic, the Kenyan banking sector was already experiencing challenges from deteriorating asset quality and moderating growth. While the interest rate cap was blamed for the reduction in the lending slowdown, we believe that the asset quality issues, delayed payments by government (pending bills) and a slowdown in the real economy (i.e. the non-fiscal driven economy) were also key contributors. Banking sector asset quality has been on a steady decline since 2011 with the non-performing loan (NPL) ratio at 12.3% at the end of 2019. In our opinion, the full effects of the pandemic are yet to be realized and the decline in NPLS of 1.9% in 2020 is likely to worsen in the short term as moratoriums come to an end. Some banks have extended the repayment periods by up to three years, showing that the increase in NPLs could be gradual. However, with the current NPLs increasing to 14.1% at YE 2020, the banking sector is far from the high NPLs experienced in 2001 at 37.9%.
While profitability has suffered, with the Return on Assets reducing by 1.0% to 1.6% overall, the negative effects of the pandemic have been curtailed as a result of reduced dividend payouts, increased holdings of government securities, and good growth in deposits which improved the capital and liquidity ratios.
Positively, the top tier of the market appears to be robust at the moment. As a result, we believe systemic banking risk to be low for the time being. Post the pandemic, GCR expects the consolidation of the sector to continue, perhaps at a faster rate due to the weakened state of some smaller banks.
Kenya is bracing for an election in 2022. While elections have been blamed for a slowdown in the economy, the effect on the banking sector has not been significant with growth levels being sustained in both deposits and loans through the election cycle. 2017 was different because of the rate caps which impacted lending negatively by reducing loans and advances by 7.7%. The deposit growth was still strong at 11.0%.
Senior Credit Analyst: Insurance Ratings
+27 11 784 1771
Group Head of Ratings
+27 11 784 1771
Related Criteria and Research
Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Services Companies, May 2019
Central Bank Annual Bank Supervision Reports
Central Bank Banking Sector Quarterly Report, December 2020
CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.