Moody’s downgrades banks on Treasury bond exposure

Top banks’ large exposure to government securities poses a risk to their credit profile, global ratings agency Moody’s has warned, citing the link between their rating and that of the State now with a negative outlook.

The agency, however, says the banks retain resilient financial profiles despite a challenging operating environment, thanks to their deposit-funded profiles, strong liquid assets and high profitability.

However, Moody’s adds, the outlook for the lenders has changed from stable to negative due to the substantial government bond holdings — at between 1.3 and two times their shareholders’ equity — which links their creditworthiness to that of the government.

“The negative outlook reflects primarily the banks’ sizeable holding of sovereign debt securities at between 1.3-2.0 times their shareholders’ equity, which links their creditworthiness to that of the government,” said the update.

“All three banks’ local-currency deposit ratings of B2 are at the same rating level of the government, and a potential weakening in the government’s credit profile will lead to a weaker credit profile for the banks.”

Between January and December 2019, Equity 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.

Banks, in general, turned to government securities as their preferred lending destination during the rate cap era, and while the cap was repealed last year, lending to the private sector is yet to pick up significantly due to concerns of an underperforming economy that still carries the risk of defaults.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 problem has been compounded by the coronavirus pandemic, which has hit the economy hard and is the main cause of the downgrade of the government’s credit outlook from stable to negative.

Moody’s added that the virus-induced economic upheaval is also a factor in the shift of the three banks’ outlook to negative.

“To a lesser degree, the negative outlook also captures the higher risks to the banks’ asset quality and profitability over the next 12-18 months, amid the coronavirus-induced economic slowdown,” the agency said.