KCB Group starts 2024 in tight spot

“The outlooks (for KCB Group and KCB Bank Kenya) are Negative,” Fitch confirmed in a December statement.

This puts the Ugandan subsidiary into a worrying stance. The local bank has recently emerged as a darling subsidiary of the group, which saw it being given Shs29 billion in 2022 to shore up its operations, according to a 2022 annual report.

It was, in fact, the only bank subsidiary of the group that received further funding, with the exception of the Shs598b used to purchase Trust Merchant Bank of South Africa.

Now that its assets are deteriorating, the cash cow is considered less creditworthy.

Fitch ratings indicate that there is a certain level of potential government support for KCB Bank of Kenya in the event of a need, though it is limited, prompting a negative outlook due to the bank’s operating environment in Kenya.

If things go wrong for the parent company in the sovereign credit market, the Ugandan subsidiary could see itself pay back the Shs476m it owes it as of 2022. This situation is made worse by the fact that the local bank has a loan that matures this year. The loan, which is worth Shs33b, was acquired from the European Investment Bank in 2017 at an annual interest rate of 11.66 percent for a seven-year period, as stated in the company’s 2022 annual report.

KCB Bank (Kenya) is given top priority in Fitch’s evaluation since it accounts for 67 percent of the group’s consolidated assets as of the end of the third quarter of 2023.

A combustible mix

Kenya’s operating environment has been impacted by elevated inflation in the first half of 2023. Additionally, there has been significant currency depreciation, which is attributed to dollar shortages. The Kenyan shilling lost almost 20 percent of its value in 2023, according to the country’s central bank governor Kamau Thugge.

Both inflation and currency depreciation create challenges for businesses and financial institutions operating in the country.

Fitch also mentions an accumulation of public sector arrears as another factor affecting the operating conditions in Kenya. Arrears in the public sector, which refers to unpaid debts or obligations, can have a ripple effect on various sectors, including the banking industry.

These challenging conditions have raised the Kenyan banking sector’s non-performing loans (NPLs) ratio, rising to a high of 15.3 percent at the end of October 2023. Non-performing loans are loans where borrowers have difficulty making repayments, and a higher NPL ratio indicates increased credit risk in the banking sector.

“There are large holdings of government debt securities, which pose additional pressure. As of the first half of 2023, these holdings were reported to be twice the banking sector equity,” Fitch elaborated.

The negative outlook on the sovereign rating further amplifies concerns associated with these holdings. KCB Group holds leading market shares in loans and deposits, accounting for 21 percent of the regional market as of the end of the first half of 2023, which cites KCB Group as a significant player.

The majority of KCB Group’s market shares in loans and deposits are attributed to KCB Bank (Kenya), its main operating bank. Additionally, Fitch says the group may have some involvement or influence in the market through its association with the National Bank of Kenya.

KCB Group’s investments in Kenya’s government securities were significant, accounting for a high 177 percent of its Fitch Core Capital (FCC) as of the end of the third quarter of 2023. This indicates a substantial allocation of resources towards government securities within the investment portfolio.

In addition to government securities, KCB Group had loans to public sector entities and parastatals. These loans represented a further 58 percent of the Fitch Core Capital at the end of 2022 and remained large in the first nine months of 2023.

Asset quality scorecard

Fitch notes that KCB Group is exposed to specific industries with high concentrations attributed to the size and nature of the domestic economy, indicating that the economic structure of Kenya influences the concentration levels. And yet the group’s asset-quality metrics are described as weaker than the sector average. Asset quality is a measure of the health of a bank’s loan portfolio, and weaker metrics typically indicate a higher proportion of non-performing loans.

The regulatory NPL ratio for KCB Group reached 16.1 percent at the end of the third quarter of 2023. This ratio represents the percentage of NPLs in relation to total loans and is a regulatory requirement for banks.

“On prudence in credit management, the bank’s loan provisions increased by 118.1 percent on additional cover taken up in Kenya impacted by depreciation of Kenya Shilling on foreign currency denominated loans,” KCB Group noted in a statement released November 2023.

It added: “On asset quality, the ratio of NPLs improved to 16.4 percent, down from 18.2 percent, as the group enhanced its efforts to improve asset quality. The stock of NPLs closed the period at KShs.187 b (Shs4.4 trillion).”

Fitch Ratings expects the NPL ratio for KCB Group to remain high in the medium term. This expectation is linked to an anticipation that borrowers’ debt-servicing costs will increase, especially in a high-interest-rate environment.

“We have deliberately continued to build strong governance and risk management frameworks to cushion the business against shocks and to guarantee shareholder returns. While we continue to operate in a tough operating environment, our subsidiaries have shown great resilience,” said KCB Group Chairman, Dr Joseph Kinyua, in a statement.

“For an outlook, we see the business sustaining the momentum,” he added.