The impact of the coronavirus pandemic on Kenya’s economy is rather obvious. Investments have slowed, consumption has shrunk and the labor market is collapsing.
Despite the broad-based shocks, the banking sector has exhibited marked resilience, providing some hope that the economy may ride the tide successfully.
The stability in the sector reflects previously established strong capital and liquidity buffers.
Monetary and prudential easing has also helped to minimize asset quality deterioration.
To be sure, the non-performing loan (NPL) ratio has remained sticky at 13.00% so far this year, the increase in credit risk notwithstanding. That said, the amount of restructured loans (over KES 700.00Bn — 25% of the sector’s loan book) reveals some potential fragility.
While the restructuring has limited a sharp increase in the NPL ratio, there may be some stress on the bank’s liquidity and capital should delinquencies rise.
READ
The classic textbook theory would suggest a need for banks to maintain high buffers to enable them to absorb potential losses stemming from increased loan loss provisions and/or write-offs.
For now, the prevailing liquidity and capital buffer suggest that the sector is well prepared to deal with the shocks, assuming that they are temporary.
To be sure, the overnight rate has dropped to below 2.0% and the central bank is holding close to KES 270.00Bn in outstanding term auction deposits (TADs).
The liquidity reflects accelerated payment of pending bills and VAT refunds at a time when private sector credit extension activities are in a stupor. The government reportedly paid KES 25.0Bn in VAT refunds at the end of June.
That said, how well the sector rides this tide remains subject to the unknown duration of COVID-19 and how quickly the economy finds its footing.
RELATED
For sure, banks will continue to play safe, by sustaining high liquidity levels, crucial for confidence in the current landscape.
NCBA Research
