October 20, 2017

Equity Bank among three banks facing global ratings downgrade

Equity Bank is facing yet another obstacle as global ratings agency- Moody’s names it among the three banks facing a possible downgrade.

This is a major blow to the giant lender, after the group CEO Dr. James Mwangi revealed in May that roughly 6 billion had been written off, and staff members retrenched following the closure of  seven of their branches in Southern Sudan due to political instability.

The global ratings agency also warned of a likely downgrade of credit and deposit scores for Kenya Commercial Bank (KCB) and Co-operative Bank of Kenya besides Equity Bank citing Kenya’s deteriorating debt situation.

The agency has hitherto placed the three banks “on review for downgrade [of] the B1 global scale long-term local-currency deposit ratings and the b1 baseline credit assessment (BCA).”

In a statement, Moody’s said as cited by Business Daily, “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.”

Further, Moody stated that the three banks’ sizable holdings of independent debt securities tell of their creditworthiness to that of the Kenyan 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.”

Placement of Kenya’s B1 rating on review for downgrade is inspired by sustained deficits occasioned by high borrowing cost.

This has driven government’s debts higher to about 56.4 per cent of GDP as of June this year.

Compared to five years ago where the debt stood at 40.5 of the GDP, government’s debt burden has exponentially increased.

“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,” added the agency.

Development of the sovereign rating and how this impact the banks’ credit profiles will be the premise of rating review for downgrade of Equity, KCB and Co-op banks respectively.

In addition, “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.”

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