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Agency slashes outlook for KCB to negative on Corona exposure

By Noel Wandera
Wednesday, July 8th, 2020
KCB Banking hall. Photo/Courtesy
In summary
    • KCB Group’s and KCB Bank’s issuer default ratings and National Ratings are driven by their standalone creditworthiness, as expressed by their Viability Ratings.
    • The negative outlook on the long-term IDRs reflects expected pressure on KCB Group’s and KCB Bank’s creditworthiness stemming from the economic impact of the coronavirus pandemic and the resulting financial profile impact.
    • Given that KCB Bank represents the dominant part of KCB Group (75% of total assets at end-2019), and in order to capture group-related risks, its viability rating (VR) is based on a consolidated assessment of the group.
    • The VR reflects a challenging operating environment and weak asset quality, balanced against a leading domestic franchise and strong profitability, capitalisation, and funding and liquidity.

Credit rating agency Fitch, has downgraded KCB Kenya Ltd’s long-term issuer default ratings (IDRs) of ‘B+’ and national long-term rating of ‘AA to negative from stable.

The agency said the action follows a revision of Kenya’s outlook to Negative, from Stable last month.

The bank’s downgraded viability ratings (VRs) emanated from Kenya’s difficult operating environment caused by the Covid-19 pandemic and the impact of locusts on the agricultural sector, according to Fitch.

Albert Bwire, a finance lecturer at the United States International University – Africa supported the position taken by the agency on the rating. 

Weighed down

“KCB is weighed down by National Bank’s non-performing loans as well as the Covid-19 pandemic.

We also expect non-performing loans in the agricultural sector will be high because of the locust invasion,” he said.

The VRs are also highly sensitive to pressure on capital metrics resulting from further provisions against the current stock of impaired loans, according to Fitch.

KCB Group’s asset quality has weakened following consolidation of NBK’s problem loan book, as highlighted by a 300bp increase in its impaired loans ratio to 15.4 per cent during 2019. 

The acquisition has had a modest impact on KCB Group’s Fitch Core Capital (FCC) ratio of 17 per cent at the end of 2019, but impaired loans net of specific provisions remain high relative to FCC at 46 per cent during the quarter under review.

Fitch said KCB Group delivers strong profitability metrics, with operating returns over risk-weighted assets averaging 5.8 per cent over the past four years. 

“Profitability metrics tend to be among the strongest in the sector, driven by a wide net interest margin that benefits from low cost of funding, healthy non-interest income and loan impairment charges that have eroded a fairly small proportion of pre-impairment profit in recent years,” it said in the statement.

Interest rates

In more difficult operating conditions, Fitch expects to see pressure on profitability metrics as a result of increased loan-impairment charges, moratoriums on capital and interest payments for borrowers and a period of lower interest rates.

The rating agency says KCB Group’s funding profile is dominated by a large customer deposit base, composed of 94 per cent of total funding at end the of 2019 and customer deposits.

Customer deposits are mainly in the form of demand and savings accounts which stood at 72 per cent at the end of the first quarter 2020, comprising a high proportion of retail (48% at end of 2019) and government-related (32%) deposits that provide low-cost and stable funding.

In Fitch’s view, the addition of NBK’s large government-related and retail deposit base is positive for KCB Group’s cost of funding.

“Balance-sheet liquidity is healthy, as reflected by a fairly low loans and customer deposits ratio (85% at end of 2019),” said the agency.

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