ADVERTISEMENT

Kenyan Banks Hoarding Cash to Cover Faltering Loans

Kenyan Banks Hoarding Cash to Cover Faltering Loans

(Bloomberg) --

Kenyan banks are expected to hoard cash as they report a jump in first-quarter loan-loss provisions to cope with the aftermath of the coronavirus pandemic.

Kenyan institutions got a cash boost when the central bank lowered reserve requirements to free up funds for lending, while interest rates have been cut to a nine-year low. Banks have now started restructuring debt for customers hard hit by a drop in business activity because of lockdown-measures aimed at slowing the spread of Covid-19.

“Banks will hold excess cash reserves, so as to cushion themselves from unforeseen shocks,” said Martin Kirimi, a senior associate for research at Nairobi-based Standard Investment Bank.

KCB Group Ltd., Kenya’s biggest bank by assets, has reorganized 80 billion shillings ($751 million) of loans, primarily by offering a moratorium of about three months on interest and principal to borrowers affected by the pandemic. Standard Chartered Bank Kenya Ltd. has restructured more than 8 billion shillings of loans. Absa Bank Kenya Plc said on April 14 it had rejigged 8.3 billion shillings of debt.

The Nairobi-based unit of Standard Bank Group Ltd., Africa’s largest lender, kicked off the first-quarter earnings round on Friday, and KCB Group Ltd. will follow on May 19.

Loan Losses

While Stanbic Bank Kenya’s loan book increased 12% to 161 billion shillings in the first quarter, the lender has restructured more than 10 billion shillings of loans because of the virus, according to an emailed statement. The “quarter has indeed put the economy in a difficult position with most sectors struggling to meet targets,” Stanbic Kenya’s Chief Executive Officer Charles Mudiwa said.

“We expect a significant increase in loan-loss provisions, skewing the cost of risk upwards,” African Alliance said in a note. Write-offs will also jump as “the pandemic accelerates structural shifts in the economy.”

Almost two-thirds of lenders operating in East Africa’s biggest economy expect the bad loans ratio to rise to 14% from 12.4%, according to a survey released this week by the Kenya Bankers Association, the industry lobby group.

“Banks are adopting defensive strategies; implying that the appetite of growing risk-weighted assets has greatly waned,” according to Standard Investment Bank’s Kirimi. Lenders are stacking up on term-auction deposits, government securities and the interbank market “to try and buttress the top line.”

Kenyan Banks Hoarding Cash to Cover Faltering Loans

Moody’s Investors Service cut its outlook for KCB, Equity Group Holdings Plc and Co-operative Bank of Kenya Ltd. to negative from stable this week because their holdings of government debt has now tied them to the fortunes of the sovereign. The ratings company also sees higher risks to their asset quality and profitability over the 12-18 months.

“Balance sheets are more likely to shrink this year,” said Faith Atiti, a senior economist at Nairobi-based NCBA Bank Kenya Ltd.

Kenyan banking stocks have declined year-to-date, with Equity Group Holding’s shares falling the most at 37%. That compares with a drop of 18% on the FTSE-NSE 25-Share Index in local currency terms, according to data compiled by Bloomberg.

©2020 Bloomberg L.P.