Moody’s Downgrades KCB, Equity, and Co-operative Bank Ratings Due to Sovereign Exposure

Moody’s has downgraded the ratings for KCB Bank Kenya, Equity Bank Kenya, and Co-operative Bank of Kenya, citing the weakened credit profile of the government. This move saw their long-term deposit rating fall to Caa1 from B3, with a negative outlook—the heightened risk of default is then linked with their high exposure to government debt securities. Both ratings indicated obligations that are speculative and rather highly risky in terms of default.

It noted that large holdings of government debt securities make their capital, profitability, and liquidity of banks sensitive to events of sovereign stress. As per the rating agency, this inextricable link of the bank’s credit risk with that of the sovereign itself constrains the standalone credit profiles and deposit ratings for the banks under review.

The Moody’s downgrade follows a prior decision it made on July 8 to lower Kenya’s rating to Caa1 negative from B3 negative, citing reduced capacity to improve revenues and reduce debt accumulation following the Finance Bill 2024.

It, however, said the operating environment remains challenging for Kenyan banks due to high lending rates, tight monetary conditions, fiscal constraints, tax hikes, spending cutbacks, and delays in government payments to contractors. These factors raised the level of asset risks and increased loan defaults.

According to Moody’s, the systemically important banks’ exposure to government securities stood at about 2.5 times KCB Bank Kenya’s TCE as of March 2024, while that of Equity Bank was 2.4 times its TCE and Co-operative Bank 1.6 times its TCE over the same period. Their non-performing loan ratio stood at 18.9 percent for KCB, 14 percent for Equity, and 14.5 percent for Co-op.

The outlook for the banks’ ratings was negative and in line with that on the Kenya sovereign rating. A worsening of Kenya’s creditworthiness could lead to a lower creditworthiness of the banks, given their high exposures to the sovereign.

The country’s banking sector increased its investment in government debt securities to Ksh 1.8 trillion last year, with a third of the customer deposits held in treasury bills and bonds. This underlines the critical need for the government to continue servicing its obligations on time.