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Moody’s upgrades outlook for Kenyan banks on interest rates fall
While assessing the sector’s overall outlook, Moody’s also specifically rated the top banks at Caa1 with a positive outlook for their credit and deposits.
Ratings agency Moody’s has upgraded its outlook for Kenyan banks, citing improved macro-economic conditions in the country including the stable shilling and falling interest rates.
The agency says banks’ profitability will drop but remain strong this year, as the industry adjusts to lower lending margins, returns on government securities and higher provisions for bad loans.
“We have revised our outlook on the banking system of Kenya (Caa1 positive) to stable from negative. GDP growth will likely pick up to 5.2 percent in both 2025 and 2026 from 4.8 percent in 2024,” the ratings firm said in a brief.
“The stable Kenyan Shilling, monetary policy easing and some resumption in credit growth will support macroeconomic stability and borrowers' loan-repayment capacity, which will stabilise asset quality after a period of considerable weakening.”
While assessing the sector’s overall outlook, Moody’s also specifically rated the top banks –KCB Bank Kenya, Equity Bank Kenya and Co-operative Bank of Kenya— at Caa1 with a positive outlook for their credit and deposits. The Caa1 rating indicates a very high credit risk, according to Moody’s ratings scale.
Moody’s said that the banking sector still faces multiple headwinds that they will need to navigate in the short term.
“However, problem loans will remain elevated because of Kenya's high fiscal deficit and the government's large amount of pending obligations –which require high taxes and spending constraints to address– as well as the depressed real estate market,” the ratings firm said.
Kenya has, however, not defaulted on its bonds and Treasury bills whose holders include banks, insurers, pension funds and individuals.
The interest rates on these securities has dropped by more than six percentage points since last year, a development that will reduce banks’ earnings from the assets.
Moody’s added that while capital levels remain strong, small banks will need to raise additional funds in phases to comply with the minimum core capital of Sh10 billion by Sh2029.
The need to raise the minimum capital from the current Sh1 billion is expected to encourage mergers and acquisitions of small institutions as well as entry of strategic investors like private equity firms.
KCB had the largest market share of assets as of September 2024 at 17.5 percent, followed by Equity (13 percent) and Co-op Bank (9.9 percent).
The three banks have large corporate and retail operations in the country, with KCB and Equity also having expanded aggressively in the East African market.
Co-op Bank, which has a subsidiary in South Sudan, has invested more in the Kenyan market where it sees untapped opportunities.
Banks are set to announce their results for the year ended December 2024 over the next few weeks.
