Global ratings agency Moodys has warned of a likely downgrade of credit and deposit scores of three Kenyan banks, citing the country's deteriorating debt situation.
The agency said it had placed on review for downgrade the B1 global scale long-term local-currency deposit ratings and the b1 baseline credit assessment (BCA) of KCB Bank Kenya Limited (KCB Bank) #ticker:KCB, Equity Bank Kenya Limited (Equity Bank) #ticker:EQTY, and Co-operative Bank of Kenya Limited (Co-op Bank) #ticker:COOP.
"Today's rating action is driven primarily by a potential weakening of the Kenyan government's credit profile, in particular in the country's fiscal strength and liquidity risk, as captured by Moody's recent decision to place Kenya's B1 government ratings on review for downgrade," agency said in a statement.
Moody's said the three banks' sizable holdings of sovereign debt securities exposed their creditworthiness to that of the government.
"To a lesser extent, today's rating action also captures pressures on Kenya's macro profile, in light of the currently challenging operating conditions, which are in turn weighing on the banks' asset quality profiles," the agency further said.
The agency on Monday said it had placed Kenya's B1 rating on review for downgrade due to persistent deficits as high borrowing costs continue to drive government indebtedness higher, among other factors.
Moody's expects that Kenya's government debt burden, which has risen to 56.4 per cent of GDP as of June -- up from 40.5 per cent five years ago -- will continue to rise due to persistently high primary deficits and borrowing costs.
The dim outlook of Kenya's debt situation is expected to erode the credit profiles and ratings of the main commercial banks.
"The top three banks' sovereign bond exposures average around 1.4x of their tangible common equity, according to the banks' unaudited financial statements as of June 2017," Moody's noted.
The agency said the rating review for downgrade of KCB, Co-operative and Equity will predominantly focus on the development of the sovereign rating and how this impacts banks' credit profiles.
"Moreover, Moody's will also re-assess Kenya's macro profile score of "Weak-", in light of the currently challenging operating conditions, and the likely impact on banks' asset quality profile.
However, the rating agency also notes the broad resilience demonstrated by Kenyan banks, supported by rated banks' strong capital and profitability buffers, and their deposit-based funding profiles" Moody's said.