This archive report was first published on 15 May 2020.
Moody's rating agency has taken a negative turn in its assessment of Kenya's top banks, downgrading the long-term deposit ratings of KCB, Equity, and Co-operative to negative from stable.
Published on May 15, 2020, this move follows Moody's recent decision to downgrade Kenya's economic outlook from stable to negative.
The three banks' exposure to sovereign debt securities, which range from 1.3 to 2 times their shareholders' equity, has led Moody's to link their creditworthiness to that of the Kenya Government.
Moody's warns that any potential weakening in the Kenya Government's credit profile will also lead to a weaker credit profile for these banks, citing the risks to their asset quality and profitability over the next 12-18 months.
Kenya's economic growth is projected to slow down to 1% in 2020 from 5.4% in 2019, with Moody's observing that the length of the COVID-19 pandemic will determine the extent of the financial metrics of these three banks.
Impact on KCB, Equity, and Co-operative ¶
KCB's negative outlook is driven by its sizeable holding of sovereign debt securities, which links its creditworthiness to that of the government. The bank's exposure to the sovereign through Government Securities is 1.3 times its total shareholders' equity as of the end of 2019.
Equity Bank is equally exposed to the sovereign bond through its holding of Government securities, which is twice its total shareholders' equity.
Co-operative Bank's negative outlook is also based on its sizable holding of sovereign debt securities, with high direct exposures to the sovereign through government securities at 1.5 times its total shareholders' equity as of the end of 2019.
Moody's negative outlook of these three banks could change back to stable only if the sovereign rating outlook is also changed back in that direction. Alternatively, the ratings could be downgraded further to junk if the sovereign rating is downgraded, given the banks' sizeable holdings of sovereign debt securities.
