Flash Report / Kenya

Kenya: Restructured loans hit 29% of total loans; a worrying sign for the banks

  • Restructured loans hit 29% of loan book, but NPLs remain stable at 13.1% showing delayed impact of weaker asset quality
  • Personal household portion of loans reduced to 28% as other sectors weaken further
  • Cost of risk set to rise as asset prices continue to be impacted by the economic environment

Following its monetary policy meeting, which left the base rate unchanged at 7%, the Central Bank of Kenya (CBK) revealed that restructured loans in the Kenya banking sector had hit 29% of total loans by end-June – much higher than the 13% recorded in early June and 9.6% in April 2020.

This is evidence of the ripple effects of the economic slowdown following the lockdown and curfew restrictions put in place in Q2. The rapid increase in restructured loans is a concern as it increases the risk of defaults down the line, in turn driving up the cost of risk for banks as they seek to adapt to a weaker economic environment.

According to the regulator, the non-performing loans ratio was 13.1% in June compared with 13.0% in May. Although the figure has not changed much, we regard it as an inaccurate representation of banks' asset quality. In our view, the restructured loans data is closer to reality, given the CBK is only allowing for restructurings on loan facilities that have faced strain from the impact of Covid-19.

We believe the loans that are already under pressure in the current weak economic environment are loans that may later be unable to make the requisite payments and become non-performing. We expect banks to increase the cost of risk to reflect the weakened outlook on these loans. Across the banking sector, there has been no uniformity on loan loss provisions for restructured loans, but we expect to able to provide an update on that after the Q2 results season.

The CBK noted that the personal segment accounted for 28% of the total amount of restructured loans. This figure has declined from the 53% recorded earlier in the month. Although the regulator has not given a clear breakdown of sectoral restructuring, we believe that there was a rise in restructuring in trade, manufacturing and real estate, which have been the worst-hit sectors besides the personal household segment.

Other highlights from the meeting

  • Private sector credit grew by 7.6% yoy, with growth driven by manufacturing (+12.3% yoy), trade (8.4%), transport and communications (14.9%) and consumer durables (15.2%). The regulator noted that, of the KES35.2bn released through the reduction in the cash reserve ratio, 89% of it has been taken up, mainly by tourism, transport and communication, real estate, trade and manufacturing.

  • The outlook for the current account deficit was set at 5.1% of GDP in 2020, with the regulator noting a rebound in exports (grew 1.7% yoy in H1 20) and diaspora remittances.

  • FX reserves are at 5.67 months import cover and the regulator is confident that this will provide a cushion against any shocks in the market.


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