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Banks exposure up on more bonds – Business Daily

Kenya Bankers Association (KBA) CEO Habil Olaka. PHOTO | SALATON NJAU | NMG
Kenyan banks’ exposure to sovereign debt has gone up significantly since 2019 as a result of faster investment in risk-free bonds at the expense of lending to the private sector, with the lenders now holding twice as much of their net assets in government debt.
The Kenya Bankers Association (KBA) said in its recently released state of the banking industry report for 2021 that the high appetite for government paper poses a risk to the recovery of private sector credit growth, especially if the government is unable to institute fiscal consolidation and continues to borrow higher amounts locally.
KBA noted that as a share of total capital, banks’ investment in government securities rose to 204 percent in 2021, compared to 181.7 percent in 2020 and 148 percent in 2019.
The sector’s combined total capital stood at Sh878.77 billion at the end of last year, data from the Central Bank of Kenya (CBK) shows, while total holdings of government securities stood at Sh1.758 trillion.
Tier two lenders generally carry the highest exposure to government debt at 307.2 percent of equity on average, followed by tier three banks at 192.2 percent and tier ones at 183.5 percent.
“The increase in the ratios was evident across all bank tiers, with tier two banks depicting the highest ratios. While the 2021 growth reflects increased exposure to sovereign risks, concerns included the fact that any delays in fiscal consolidation would have adverse implications on private-sector credit recovery and increase bank-sovereign linkages,” said KBA in its report.
“The motive of holding government securities is varied. For instance, banks hold government securities to support their liquidity management as the higher the loan-to-deposit ratio, the lower is the year-on-year changes in the ratio of government securities to total assets.”
High exposure to government debt links banks’ creditworthiness to that of the government, which would leave them with a negative outlook for instance if the same were to be applied to the government by global rating agencies.
Rating agency Moody’s has in the past flagged this sovereign debt exposure as a concern, even when the concerned banks have performed strongly in other parameters.
In 2020, for instance, the agency changed its outlook for the country’s three largest lenders—Equity Group, KCB, and Co-operative Bank— from stable to negative shortly after doing the same for the sovereign, citing the linkage through debt exposure.
This was despite these banks retaining resilient financial profiles thanks to their deposit-funded profiles, strong liquid assets, and high profitability. Banks have generally been bulking up on their government securities holdings since 2016 when a cap on rates on customer loans was imposed.
The repeal of the rate cap two years later did not dilute their appetite for risk-free investments, while the Covid-19 pandemic also made them warier of lending to risky borrowers.
Private sector credit growth, therefore, remained below the pre-rate cap levels until June this year, when it stood at 12.2 percent—the highest since the 13.5 percent growth seen in March 2016.
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Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.