Lenders turn to ratings as financials lose shine

Cooperative Bank CEO Gideon Muriuki

Kenyan banks are hoping endorsement by international rating agencies will differentiate them from the negative opinion taken of the country’s banking sector.

Lenders are facing challenges in profitability and growth, with global debt ratings agency Moody’s noting that the seasonal drought has affected agriculture and power generation, elections have delayed investments and lending rate caps have constrained banks’ flexibility to price risks.

Moody’s Investor Services, however, gave Cooperative Bank a first-time B1/Not Prime global local-currency deposit rating, with a stable long-term outlook, alongside Equity Bank.

“The primary drivers and key similarities of Equity Bank’s and Co-op Bank’s standalone credit profiles are their strong loss-absorbing and liquidity buffers to withstand their respective weakening asset quality in the context of a difficult operating environment,” said the agency.

South African ratings firm Global Credit Rating (GCR) has given Kenya Commercial Bank long-term and short-term national scale ratings of AA(KE) and A1+(KE) respectively.

GCR said the bank is well structured, governed and capitalised to play a stronger role in East Africa’s economic transformation, citing KCB’s resilient earnings performance.

KCB has consistently retained the rating since it was initially assigned in June 2013.

“The bank is predominantly funded by customer deposits, drawing on its ability to attract deposits, supported by an extensive branch network and alternative delivery channels, to fund its operations,” said GCR.

With the fortunes of the banking industry on thin ice, ratings agencies are proving to be important in giving shareholders confidence as the lenders show willingness to open up to inspection.

Cooked statements

There is, however, a risk of getting a negative rating or having it withdrawn since the mark gives the market a pointer when the lender is facing difficulties.

On November 8, Moody’s downgraded Shelter Afrique to Ba3 from Ba1, following a whistleblower’s report alleging the lender cooked financial statements through restructuring overdue loans to appear like they were performing, thereby suppressing the volume of toxic mortgages.

Shelter Afrique was subsequently graded B3, putting the mortgage lender a heartbeat away from the ‘C’ grade which Moody’s designates as ‘poor quality and very high credit risk’.

GCR also lowered Shelter Afrique’s long-term rating to B(KE) from A+(KE) while short-term rating has fallen to B(KE) from A1(KE).

Kenya’s largest banks all posted a drop in first-quarter earnings as a cap on commercial lending rates curbed the amount of interest they can charge on loans.

The decline in net interest income in the three months ranged from as much as 15 per cent at Equity Group, the biggest lender by market value, to 1.5 per cent at Co-operative Bank, which ranks at number three.