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Kenya's largest banks restructure 7% of loans – negative

  • 7 of the largest Kenyan banks restructure loans of KES176bn in April 2020 (7% vs our expected 3-6%)

  • Likely points to the possibility of higher-than-expected NPLs at these banks

  • DTB and KCB have the highest exposures overall, while Equity Group faces exposure in personal and trade segments

Kenya's largest banks restructure 7% of loans – negative
Faith Mwangi
Faith Mwangi

Equity Research Analyst, Financials (East Africa)

Tellimer Research
11 May 2020
Published byTellimer Research

According to the Central Bank of Kenya, the 7 largest banks in Kenya have restructured loans amounting to KES176bn in April 2020 (7% of total loans as at January 2020) following the Covid-19 policy response that called for loan extension and restructuring. This is higher than the 3% in March. Excluding Standard Chartered Bank, we cover 6 out of the 7 largest banks in Kenya that include KCB, Equity, Co-op, NCBA (NIC bank and CBA group), ABSA Kenya (formerly Barclays) and DTB. We view the news as negative as we had estimated the restructuring rate between 3-6% of loans for our covered banks(including Stanbic Holdings), which controls c63% of total industry loans.

Sector-wise, most of the loans were restructured for tourism (31%), real estate (17.2%), building and construction (17.0%) and trade (12.4%). We expect requests for extension of personal loans and the restructuring of other sector loans to also ramp up in the coming months. The figure for personal household loans was unclear, but the numbers are likely high given the job and salary cuts in the last month. According to the Ministry of Labour and Social Protection, as at April 2020, Kenya’s formal sector had lost 5% of its labour force with the number set to rise further. The 5% does not include Kenyans who have had a pay cut or who have been sent on unpaid leave. In the informal sector, about 58% of jobs have been affected as these rely heavily on imports from China, which accounts for c21% of Kenya’s total imports.

Among our covered banks, DTB and KCB have the highest exposures overall to the key economic segments facing restructuring. Equity Group does not normally give a clear breakdown of its exposure to various sectors, but from our assessment, the bank is likely to face significant restructuring in the personal and trade segments.

Furthermore, following the reduction of the cash reserve ratio to provide additional funds to banks, 50% of these funds have already been used up. We expect the regulator to pursue further policy changes to support sector liquidity. The main sectors funded are tourism (45.58%), agriculture (16.7%), real estate (11.94%) and trade (10.37%). 

We expect more restructuring as the Covid-19 situation on the ground worsens. Kenya now has 672 confirmed cases, 239 recoveries and 32 deaths. The government has extended the curfew into May, movement in and out of major cities are restricted and business operation hours have been reduced further. 

Other key highlights from the Central Bank of Kenya:

  1. The current account deficit is projected to remain stable at 5.8% of GDP in 2020. The import of petroleum products is expected to decline by US$1.1bn (or 32%) due to lower oil prices, offsetting the decline in export earnings and remittances.
  2. Foreign exchange reserves are projected to remain adequate through 2020 with support from international institutions. Kenya recently got approval for a US$739mn Rapid Credit Facility (RCF) from the IMF. Foreign exchange reserves are projected to close the year at about 5 months of import cover.
  3. The Central Bank of Kenya is seeking to regulate credit-only entities starting with digital lenders, which we see as positive. So far, although digital borrowing served to boost a bank's fees and commission income, the lack of regulation has created an information asymmetry in the credit market whereby banks have little to no information on whether their customers have been active on the digital credit market – all they have is bank-related information. The new regulatory framework will initially only focus on digital lenders and then extend to all unregulated credit providers. This follows recent regulation where digital lenders were no longer required to supply defaulter information to credit reference bureaus.