This archive report was first published on 15 May 2020.
On May 15, 2020, Moody's Investors Service issued a warning that the large exposure of top Kenyan banks to government securities poses a risk to their credit profile.
The agency cited the link between the banks' rating and that of the State, which now has a negative outlook.
Despite a challenging operating environment, the banks retain resilient financial profiles, thanks to their deposit-funded profiles, strong liquid assets, and high profitability.
However, Moody's added that the outlook for the lenders has changed from stable to negative due to their substantial government bond holdings, which link their creditworthiness to that of the government.
Between January and December 2019, Equity Bank raised its government securities holdings from Sh161 billion to Sh172.1 billion, KCB's holdings went up from Sh109.9 billion to Sh153.9 billion, while Co-operative Bank rose from Sh80.3 billion to Sh117.8 billion.
The banks turned to government securities as their preferred lending destination during the rate cap era, and while the cap was repealed last year, lending to the private sector is yet to pick up significantly due to concerns of an underperforming economy that still carries the risk of defaults.
The coronavirus pandemic has hit the economy hard and is the main cause of the downgrade of the government's credit outlook from stable to negative.
