Credit rating agency Moody’s expects Equity Bank Kenya Limited’s stronger profitability buffers and higher liquid assets to help it withstand default on loans by the small and medium-sized enterprises (SMEs).
Moody’s in its latest commentary ‘Kenya’s policy measures will reduce coronavirus’ credit-negative effect on banks’ says it expects SMEs to be the most hit by the COVID-19 pandemic’s effect on the economy.
As a result, with a greater focus on lending to small and medium-sized enterprises, Equity Bank ‘faces the greatest challenge because 59% of its loan book was exposed to SME lending as of the end of December 2019’, Co-operative Bank at 6 per cent and KCB Group at four per cent.
Fortunately, “Equity Bank has stronger profitability buffers and higher liquid assets than its rated domestic peers, which will help mitigate asset-quality pressure,” says Moody’s.
In 2019, after the repeal of the interest rate capping, the Ratings Agency said it would result in higher overall loan growth over the next 12-18 months tilted more towards small enterprises.
“We expect Equity Bank and Co-op Bank to benefit most relative to KCB in terms of loan growth as their lending has been constrained most under the lending rate caps,” said Moody’s.
All the three banks have a credit rating of B2 stable and B2, from Moody’s.
At its last sitting, the Central Bank’s Monetary Policy Committee reduced both the Central Bank Rate (CBR) and Cash Reserve Ratio (CRR) by 100bps to 7.25% and 4.25%, respectively to ensure that credit continues to flow to businesses and households and that the banking system remains sufficiently liquid.
According to the agency, lower lending rates will provide a small cash flow relief to borrowers, but will also weigh on banks’ net interest margins, the main contributor to banks’ profitability.
They further say other fiscal measures in place will help mitigate the deterioration in banks’ loan book quality amid a material growth slowdown of the Kenyan economy.
“Kenyan banks are most exposed to personal loans that account for a bit more than a quarter of loans as of the end of June 2019 , with trade the second-largest exposure at 19% of total loans.”
Non-Performing Loans (NPLs) from the 9 commercial listed banks – I&M, Absa Kenya, Standard Charted Kenya, KCB group, Equity Group, Co-op Bank, Diamond Trust Bank, Stanbic Bank and NBCBA – averagely stands at 13.4 per cent. According to Cytonn Investments, this was faster growth than the 4.3% recorded in FY’2018, indicating that there was an improvement in credit extension, with banks targeting select segments such as corporate entities and Small and Medium Enterprises (SMEs), the growth in loans was accelerated towards the tail end of FY’2019 following the repeal of interest rate cap in November 2019.
“At the same time, with over 51% liquidity ration for the sector, very few banks may actually need to tap into the excess liquidity unless the risks are protracted for a longer time with grave implications for systemic businesses.
For now, the market will continue to monitor how businesses are affected by the pandemic and how effective fiscal responses will be in restoring the much-needed confidence,” commentary from NCBA Bank Research Team.