Agency warns banks on huge State loans

Local banks risk higher costs of borrowing from international markets because of the huge loans they offer to the Government.

Global credit rating firm Moody's warned banks to reduce the rate at which they lend money to the Government since the trend exposed them to credit rating risks.

A Moody's report shows that Kenya is the second most exposed country to government debt among 10 peer countries, where banks have lent 347 per cent of the value of their shareholding to the State.

Egyptian banks have lent 561 per cent of their equity to Mohamed Morsi's administration, followed by Nigeria, Angola, South Africa, and Ghana.

The concern with the global rating agency is that if the country’s credit profile is downgraded, then local banks are also downgraded due to their State portfolios.

This makes them less attractive when looking for money in the global markets.

“Over 90 per cent of recent rating actions have been driven by sovereign actions, which have a direct impact on banks’ creditworthiness even if banks’ financial performance is unaffected,” Moody's said.

Kenya’s top three banks - Kenya Commercial, Equity and Cooperative - are rated by Moody's and their ratings tend to be affected by Kenya’s creditworthiness.

“Banks’ exposure to their respective government securities is typically 1.5 times their equity, but rising to over two times equity when adding loans to the Government and State-owned entities. This leaves their credit profiles vulnerable to sovereign risk,” Moody's said.

Just like countries, banks get part of their funding from the international market for onward lending, whose cost is dictated by their credit ratings.

Kenya Commercial Bank (KCB) in the first quarter of 2018 obtained Sh10 billion ($100 million) from the African Development Bank for onward lending to corporate, and small and medium enterprises.

In 2017, KCB had sought to make a cash call after shareholders approved the bank’s plan to raise Sh10 billion through a rights issue to boost its capital levels, but the equities market has not been accommodative.

The rating firm said it expected high exposure to be maintained in light of on-going high fiscal deficits that were financed by local banks. Since the enactment of the rate cap, banks have concentrated their lending to the Government.