A economic avalanche is coming

[Omollo]

Rating Action: Moody's places on review for downgrade the ratings of three Kenyan banks
Global Credit Research - 04 Oct 2017
Rating action follows the sovereign rating's review announcement
Limassol, October 04, 2017 -- Moody's Investors Service, ("Moody's") has today placed on review for downgrade the B1 global scale long-term local-currency deposit ratings and the b1 baseline credit assessment (BCA) of three Kenyan banks: KCB Bank Kenya Limited (KCB Bank), Equity Bank Kenya Limited (Equity Bank), and Co-operative Bank of Kenya Limited (Co-op Bank). A full list of the banks' ratings affected by today's rating action is at the end of this press release.

Today's rating action is driven primarily by a potential weakening of the Kenyan government's credit profile, in particular in the country's fiscal strength and liquidity risk, as captured by Moody's recent decision to place Kenya's B1 government ratings on review for downgrade. The banks' sizable holdings of sovereign debt securities inevitably link their creditworthiness to that of the national government. To a lesser extent, today's rating action also captures pressures on Kenya's macro profile, in light of the currently challenging operating conditions, which are in turn weighing on the banks' asset quality profiles. For further information, refer to the sovereign press release "Moody's places Kenya's B1 rating on review for downgrade" (https://www.moodys.com/research/--PR_373279).

RATINGS RATIONALE

-- WEAKENING CREDIT PROFILE FOR KENYA EXERTS PRESSURE ON BANKS' OWN CREDIT PROFILE

The rating action is primarily driven by the potential deterioration of the Kenyan government's credit profile, as captured by Moody's recent rating action to place the B1 sovereign rating on review for downgrade. Kenyan banks' high exposure to government debt links their credit profile to that of the government, leading to banks' standalone credit profiles and ratings being constrained by the rating of the government. The top three banks' sovereign bond exposures average around 1.4x of their tangible common equity, according to the banks' unaudited financial statements as of June 2017.

-- CHALLENGES IN THE OPERATING ENVIRONMENT

A secondary driver for the rating review are the current challenges in the operating environment, which place pressure on banks' asset quality metrics. Although Kenya has strong medium-term economic growth prospects, with growth rates above the sub-Saharan African level, some structural features and developments have weighed on the recent performance of the banking system. These challenges -- which include the introduction of a regulatory limit on lending rates and a slowdown in business activity and investor confidence, given the prolonged presidential elections -- will likely lead to tighter credit conditions for the country's borrowers' and continue to weigh on banks' asset quality metrics.

FACTORS TO BE CONSIDERED IN THE RATING REVIEW

The rating review for downgrade will predominantly focus on the evolution of the sovereign rating and how this impacts banks' credit profiles. Moreover, Moody's will also re-assess Kenya's macro profile score of "Weak-", in light of the currently challenging operating conditions, and the likely impact on banks' asset quality profile. However, the rating agency also notes the broad resilience demonstrated by Kenyan banks, supported by rated banks' strong capital and profitability buffers, and their deposit-based funding profiles.

As part of the review process, Moody's will consider each of the rated bank's recent financial performance, key rating drivers and potential vulnerabilities:

- KCB Bank Kenya Limited

As part of its review of KCB Bank, Moody's will assess the interlinkages of the bank's credit profile to that of the sovereign, given its high exposures to government securities at 1.3x its tangible common equity, as of June 2017. In addition, Moody's will assess the impact of a potentially deteriorating operating environment and macro profile on KCB's own credit profile. While KCB Bank's asset quality has been broadly stable during 2017, despite the challenging conditions, its problem loans remain above its rated domestic peers at 6.8% (excluding interest in suspense) of gross loans as of June 2017, which includes a few large construction sector borrowers affected by government arrears. In turn, the collateralised nature of these exposures leads to a weak provisioning coverage at 26% of problem loans. However, the rating agency notes the bank's regulatory provisioning reserves that form part of equity (in line with the Central Bank of Kenya regulation), which brings the total coverage up to 71%.

At the same time, Moody's acknowledges the bank's currently strong profitability and capital metrics. Although KCB Bank's lending margins have been impacted by the regulatory lending rate cap, its profitability remains strong with net income at 3.6% of tangible assets (during the first half of 2017). In addition, KCB Bank's overall solvency is supported by its high tangible common equity of 14.6% its total assets as of June 2017, which strengthens its ability to withstand unexpected losses.

- Equity Bank Kenya Limited

In terms of its review of Equity Bank, Moody's will assess the interlinkages of the bank's credit profile to that of the sovereign, given its high exposures to government securities at 1.9x its tangible common equity, as of June 2017. In addition, Moody's will assess the impact of a potentially deteriorating operating environment and macro profile on Equity Bank's own credit profile. Equity Group's asset quality metrics (a good proxy for Equity Bank's ratios) have weakened over the past 18 months, with problem loans (excluding interest in suspense) to gross loans weakening to 6.4% as of June 2017, from 2.7% as of end-2015. Moody's expects further asset quality strain in the small and medium sized enterprise (SME) segment in particular -- which accounts for over 50% of Equity Bank's loans -- given increasing stress from lower consumer disposable income and tighter credit conditions.

Despite Equity Bank's high SME exposure, Moody's notes that the bank is well placed to withstand the particular challenges it faces by reducing risk-taking, maintaining strong profitability metrics and solid capital buffers. Equity Bank's net income stood at 4.1% of tangible assets during the first half of 2017, with its tangible common equity at 13.8% of total assets.

- Co-operative Bank of Kenya Limited

In terms of its review of Co-op Bank, Moody's will also assess the interlinkages of the bank's credit profile to that of the sovereign, given its high exposures to government securities at 1.1x its tangible common equity, as of June 2017. In addition, Moody's will assess the impact of a potentially deteriorating operating environment and macro profile on the bank's own credit profile. Moody's expects elevated asset risks as the bank pursues a more aggressive loan growth strategy, despite the challenging operating environment, following a period of internal re-organisation and strategic transformation that has given the bank new tools and confidence to increase market share. Nonetheless, Co-op Bank's problem loans (excluding interest in suspense) of 4.5% of gross loans as of June 2017, remain better than larger rated domestic peers, reflecting its corporate focus including lending to Kenya's Savings and Credit Co-operative Organisations and salary-assigned personal lending.

Moody's finally notes that Co-op Bank maintains strong overall profitability with net income at 3.5% of tangible assets during the first six months of 2017, while its tangible common equity at 16.4% of total assets as of June 2017, supports its overall solvency and ability to withstand unexpected losses.

WHAT COULD MOVE THE RATINGS UP/DOWN

As indicated by the review for downgrade on the sovereign rating, any further deterioration in the creditworthiness of Kenya would exert downward pressure on the banks' ratings, in view of their large holdings of sovereign debt securities. In addition, the banks' ratings could be downgraded if Moody's forward looking assessment of the operating conditions worsens, which would in turn lead Moody's to expect a weakening in banks' financial performance.

Conversely, there is no upwards rating momentum in the banks' ratings, as their standalone credit profiles are already on a par with the sovereign rating. The ratings may be confirmed at their current level if operating conditions improve and the rating of the Kenyan government is also confirmed at B1.

LIST OF AFFECTED RATINGS

Issuer: Co-operative Bank of Kenya Limited

Placed On Review for Downgrade:

....LT Bank Deposits (Local Currency), currently B1, Outlook Changed To Rating Under Review From Stable

....LT Bank Deposits (Foreign Currency), currently B2, Outlook Changed To Rating Under Review From Stable

....NSR LT Bank Deposits, currently Aa2.ke

....NSR ST Bank Deposits, currently KE-1

....Adjusted Baseline Credit Assessment, currently b1

....Baseline Credit Assessment, currently b1

....LT Counterparty Risk Assessment, currently Ba3(cr)

Affirmations:

....ST Bank Deposits, Affirmed NP

....ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Rating Under Review From Stable

Issuer: Equity Bank Kenya Limited

Placed On Review for Downgrade:

....LT Bank Deposits (Local Currency), currently B1, Outlook Changed To Rating Under Review From Stable

....LT Bank Deposits (Foreign Currency), currently B2, Outlook Changed To Rating Under Review From Stable

....NSR LT Bank Deposits, currently Aa1.ke

....NSR ST Bank Deposits, currently KE-1

....Adjusted Baseline Credit Assessment, currently b1

....Baseline Credit Assessment, currently b1

....LT Counterparty Risk Assessment, currently Ba3(cr)

Affirmations:

....ST Bank Deposits, Affirmed NP

....ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Rating Under Review From Stable

Issuer: KCB Bank Kenya Limited

Placed On Review for Downgrade:

....LT Issuer Rating, currently B1, Outlook Changed To Rating Under Review From Stable

....LT Bank Deposit (Local Currency), currently B1, Outlook Changed To Rating Under Review From Stable

....LT Bank Deposit (Foreign Currency), currently B2, Outlook Changed To Rating Under Review From Stable

....Adjusted Baseline Credit Assessment, currently b1

....Baseline Credit Assessment, currently b1

....LT Counterparty Risk Assessment, currently Ba3(cr)

Affirmations:

....ST Issuer Rating, Affirmed NP

....ST Bank Deposits, Affirmed NP

....ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Rating Under Review From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christos Theofilou, CFA
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

[gout]

Capitalism is built on consumerism and more consumerism. Celebrating austerity is similar to celebrating choking claiming that one is developing stronger throat muscles. Government recurrent expenditure is what goes around in teas, flowers, fuel, per diems...all that. Currently when you talk of development budget it is likely that 60% of the monies is shipping out in materials, interest making the short term even dire.

Meanwhile

Many businesses want elections over before investing further, mindful of the weeks of post-election violence that followed the disputed 2007 presidential poll, killing around 1,200 people and plunging the economy into a nose-dive.

"People stopped investing in real estate or businesses waiting to see the outcome of the election ... There are delays in payments from end to end," said a bank CEO, who did not wish to be named.

SMALL BUSINESSES HIT

Those delays are choking John Wambua's small business transporting plastic water tanks to retailers. His clients haven't paid for three months so he has been unable to service the loan on his truck.

"We have had a big challenge due to the election. The people we transport the water tanks for are not selling and so we have no work," he said wearily at the auction yard, where he had gone to beg for more time before his truck is auctioned.

Non-performing loans in the banking industry rose to 10.7 per cent in August, from 9.9 per cent in June, the central bank said, jumping into double digits for the first time since 2007.

https://www.the-star.co.ke/news/2017/10/03/kenyan-debtors-struggle-to-hold-on-to-assets-as-repossessions-rise_c1646461

[gout]

We are not able to lend to the micro borrowers whose default rate is as high as 80 per cent

http://www.businessdailyafrica.com/corporate/companies/Equity-posts-3pc-drop-in-net-profit/4003102-4162634-14d401cz/index.html

Is he just exaggerating or what? 80% default rate?? In a chang'aa den a 1% default rate usually ends up in stabbing to death.

[Nefertiti]

Exactly - policy experimentation like M-pesa is the corner stone of innovation. No need to change such impactful policy just because someone is making 3% less profit. Way forward is for evidence based policy making - we need kippra, universities, gov economists and such bodies doing empirical studies that should inform policy changes. Parliament also need to employ economist and social scientist - who can advice them on policy making - because ultimately parliament are going to make these kind of decisions.

Look at the oil industry - an oligochary that was quick to hike prices and slow to reduce prices claiming global market bla de bla - they warned of doom and gloom if they were regulated - but ERC has done a fair job and everyone is happy - and good thing there is PREDICTABILITY - we have one month or two months before price review. The same situation with banks - nobody now wakes up and find their interest shot up overnight - we know CBK will meet once a month and decide on base lending rate .

No need to change this law - we just need to allow investment bank, micro-finance, shylocks and angel investor who want to lend at usurious rate do so - but outside the banking sector.

80% default rate... Come on. I don't trust the bankers fully right now. They are on a campaign to undo the interest cap. They have optimized a few things - especially on digital banking - but are yet to properly burn the excess fat. I think "agents" are actually excess fat in places with 3G internet like Nairobi. They need to embrace innovation squarely - and create new products and revenues - like they did with thin sim to create Equitel. In any case 3% profit dip is hardly reason to reverse such an impactful policy.

[gout]

Then came Covid19 mismanagement. The social restrictions that were unnecessary should have gone once we had evidence that we were overreacting and fear mongering.

The continuing mismanagement of the virus will devastate an economy that was already on a cliff. Next 3 months are definitive as the consequences manifest among individuals, businesses, households, families, government salaries, counties and all what can hit the fan.

[GeeMail]

Go

Then came Covid19 mismanagement. The social restrictions that were unnecessary should have gone once we had evidence that we were overreacting and fear mongering.

The continuing mismanagement of the virus will devastate an economy that was already on a cliff. Next 3 months are definitive as the consequences manifest among individuals, businesses, households, families, government salaries, counties and all what can hit the fan.

But Gout who is listening? Everyone knows this Covid19 thing is a circus (like IEBC) but people need comic relief. Nobody will be laughing when they realize they were being distracted from real politics.

[gout]

The ability of majority of Mwafrika to suffer is inelastic; we know no dignified living. Those taken down by the poor leadership and mismanagement of the virus will wear tatters and believe they are cursed while the elites continue gourging themselves with covid loans as they cemtralize power. Those unable to afford life in the urban slums will go back to apathy in the villages.

Go

Then came Covid19 mismanagement. The social restrictions that were unnecessary should have gone once we had evidence that we were overreacting and fear mongering.

The continuing mismanagement of the virus will devastate an economy that was already on a cliff. Next 3 months are definitive as the consequences manifest among individuals, businesses, households, families, government salaries, counties and all what can hit the fan.

But Gout who is listening? Everyone knows this Covid19 thing is a circus (like IEBC) but people need comic relief. Nobody will be laughing when they realize they were being distracted from real politics.

[hk]

Then came Covid19 mismanagement. The social restrictions that were unnecessary should have gone once we had evidence that we were overreacting and fear mongering.

The continuing mismanagement of the virus will devastate an economy that was already on a cliff. Next 3 months are definitive as the consequences manifest among individuals, businesses, households, families, government salaries, counties and all what can hit the fan.

In addition to the dire economic condition, the treasury is raising taxes on basic goods, cheap beer, cooking gas etc. This will further cripple the economy and will lead to low tax collection. The only solution is to slash the budget by a whopping 50%, restructure debt , deregulate and cut excise taxes. The Key to economic development in Kenya is local production and consumption. 

[RV Pundit]

But is 50% won't be enough to pay salaries and debt. Maybe if we restructure debt - from paying 7B dollars - we could I don't know roll over some of it.

I see they have increase keg beer when it's know to be very sensitive to price increases? 

In addition to the dire economic condition, the treasury is raising taxes on basic goods, cheap beer, cooking gas etc. This will further cripple the economy and will lead to low tax collection. The only solution is to slash the budget by a whopping 50%, restructure debt , deregulate and cut excise taxes. The Key to economic development in Kenya is local production and consumption. 

[hk]

But is 50% won't be enough to pay salaries and debt. Maybe if we restructure debt - from paying 7B dollars - we could I don't know roll over some of it.

I see they have increase keg beer when it's know to be very sensitive to price increases? 

In addition to the dire economic condition, the treasury is raising taxes on basic goods, cheap beer, cooking gas etc. This will further cripple the economy and will lead to low tax collection. The only solution is to slash the budget by a whopping 50%, restructure debt , deregulate and cut excise taxes. The Key to economic development in Kenya is local production and consumption. 

The salaries have to be cut especially for non essential services.  For example Agriculture is allocated 59b but most of it goes to salaries and parastals, this need to be reduced dramatically. This applies across all ministries. Multilateral debt can be restructured but Eurobonds covenants might be violated, Kenya is in a dire situation and hard choices have to be made. Non performing loans are piling up https://www.businessdailyafrica.com/news/Value-of-bad-loans-hits-Sh366bn/539546-5572570-o5w86h/index.html , if you add 366b to 271b already restructured( creditors given some reprieve) it means about 600b is non performing. Meaning most of the banks can't even meet their CBK liquidity ratios.

[RV Pundit]

That is a politically hot potato. I think for now asking bilateral and multilateral donors for debt rescheduling may work - plus cutting down on development budget.

Uhuru legacy is gong to tatters.

The salaries have to be cut especially for non essential services.  For example Agriculture is allocated 59b but most of it goes to salaries and parastals, this need to be reduced dramatically. This applies across all ministries. Multilateral debt can be restructured but Eurobonds covenants might be violated, Kenya is in a dire situation and hard choices have to be made.

[gout]

Mad Njoroge at CBK by declaring that banks can be fined for not giving out loans set up the collapse of ponzi. Banks just set loan limits at ZERO.

It is even crazier when you pay the mobile loans, they refuse to give new loans yet most people were surviving on merry go round of these mobile lenders. They will be more chaos.

Firing people amidst a crisis is quite unpopular but counties and ministries should seize the moment. Uhuru attempts to be loved will be tested each passing second.

[hk]

Mad Njoroge at CBK by declaring that banks can be fined for not giving out loans set up the collapse of ponzi. Banks just set loan limits at ZERO.

It is even crazier when you pay the mobile loans, they refuse to give new loans yet most people were surviving on merry go round of these mobile lenders. They will be more chaos.

Firing people amidst a crisis is quite unpopular but counties and ministries should seize the moment. Uhuru attempts to be loved will be tested each passing second.

Tala and the other non bank mobile merchants are the ones not issuing new loans. The reason being CBK declared that they can't list defaulters to credit bureaus. The banks e,g kcb,equity, coop and Ncba are still issuing mobile loans.The banks have to keep providing mobile loans its the only thing that's working.  Look at non performing loans https://www.businessdailyafrica.com/news/Value-of-bad-loans-hits-Sh366bn/539546-5572570-o5w86h/index.html whopping 366b plus restructured loans of 270b , basically we have zombie banks.

[gout]

Fuel crisis. Broke Treasury reallocating billions to KMC, DoD, NIS.

I bet since BBI serious looting has been going as long as you shout Asimio. Must be the most expensive political experiment.

It should be buried tomorrow - tragic the costs won't be surcharged to its architects - it has buried the economy.

[gout]

Construction materials prices unmanageable. Not sure how scrap metal dealing ban has contributed to this.
https://www.businessdailyafrica.com/bd/markets/market-news/price-of-construction-materials-rise-sharply-3764634

Iron ore mining was doing well precolonial times. Why import while so much iron ore all over?   

[gout]

The big boys are defaulting.

https://www.businessdailyafrica.com/bd/economy/16-accounts-hit-banks-with-sh40bn-defaults-3766006

[Njuri Ncheke]

This thread is another prophetic analysis in current economics and drought,its great to see nipate has geniuses,well done Gout, it's spot on years later.

[sema]

The shilling is now at 114. What next?

[Georgesoros]

This thread is another prophetic analysis in current economics and drought,its great to see nipate has geniuses,well done Gout, it's spot on years later.

Prophets of doom. 
As Europe and USA readjusts we are soon going to see severe recession. Be ready to buy cheap assets.

[hk]

The big boys are defaulting.

https://www.businessdailyafrica.com/bd/economy/16-accounts-hit-banks-with-sh40bn-defaults-3766006

rumor mills has it that devki and simba cement is among the defaulters. Maybe thats the reason they sold their geothermal company. Inflation is crushing the economy and there's no reprieve in sight.