Moody’s assigns not prime B ratings to Kenya Commercial Bank

moody's-investors-services-1Moody’s Investors Service on Monday assigned not prime B ratings, reflecting high credit risk, and a “stable” outlook to Kenya Commercial Bank Ltd (KCB)

Local and foreign currency issuer ratings were assigned B1/Not Prime global; Local-currency deposit ratings, B1/Not Prime; foreign currency deposit ratings, B2/Not Prime (constrained by Kenya’s B2 country ceiling for such foreign currency deposits); and both standalone baseline credit assessment (BCA) and adjusted BCA, b1.

Kenya Commercial Bank Ltd was also assigned a Counterparty Risk Assessment (CR Assessment) of Ba3(cr)/Not Prime(cr).

Moody’s says KCB’s ratings reflect solid profitability metrics, strong capital buffers to insure against unforeseen loan losses, deposit-based funding structure and high levels of liquid assets, and a strong domestic franchise that positions the bank to take advantage of Kenya’s growth potential (projected at 5.6% GDP growth in 2015 and 6.3% in 2016.)

The rating agency noted that the bank, for instance, reported pre-provision and net profits of 6.1% and 3.5% of average assets respectively in the first half of 2015.

It says however that “these strengths are balanced against the bank’s high asset risk, amid elevated non-performing loans (NPLs) and credit costs, and structural challenges in Kenya’s operating environment”, noting that the bank’s credit profile is closely correlated with the Kenyan government’s creditworthiness given high direct government related exposures.

The bank’s high deposit concentrations from government poses the risk of government reigniting at some point, its intentions to manage the idle and excess funds of government and public sector entities more efficiently.

“As such, the introduction of a Treasury Single Account presents a downside risk to the bank’s funding profile and could lead to approximately 6.5%-10% of deposits from its Kenyan operation being withdrawn from the bank”, Moody’s said.

Kenya is assigned a “weak” macro profile by Moody’s but is expected to see fair GDP growth from its continuous efforts to diversify its economy, improve infrastructure and expand information and communication technology, along with a supply of stable, low-cost customer deposits and healthy liquidity buffers, which support the financial stability of its banks.

The rating agency again notes that Kenya’s strengths are balanced against the relatively small size of its economy, low GDP per capita, a high incidence of corruption, and a moderate susceptibility to event risk, given a history of domestic political instability and security-related challenges.

The Nairobi-based Kenya Commercial Bank is one of the largest licensed commercial banks in Kenya and a subsidiary of the KCB Group of companies – the oldest and one of the largest financial organizations in East Africa.

KCB is listed on the Nairobi, Dar es Salaam and Rwanda stock exchanges.

By Emmanuel Odonkor

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