Banks still face bad loans problem – Global ratings agency says

Global ratings agency, Moody’s has stated that bad loans will continue to be the biggest challenge facing local banks this year, keeping provisioning levels at a higher level compared to the pre-pandemic period.

The quality of banks’ loan books improved in the last nine months of 2021, with the default rate falling to 13.1 percent of total credit disbursements in December from a peak of 14.6 percent in March 2021.

Moody’s estimates that this will continue to fall over the next 12 to 18 months, but remain above the 12 percent ratio the lenders recorded at the end of 2019.

The jump in bad loans in 2020 and early last year was a result of massive job losses and businesses struggling to survive because of local and international restrictions meant to curb the spread of coronavirus.

“Problem loans will likely remain high, a reflection of long-term issues such as corporate governance weaknesses in certain large family-owned conglomerates, government payment arrears and a high average lending rate (12.1 percent as of September 2021),” said Moody’s.

“We expect the banks’ loan-loss provisioning coverage of non-performing loans (NPLs) to remain strong at close to 70 percent (June 2021: 72 percent), up from around 60 percent pre-pandemic.”

The level of provisioning banks has a direct impact on their profitability. The funds set aside to cover bad loans directly hit the bottom line and also have the effect of eroding the capital base.

Higher provisioning in the aftermath of the pandemic in 2020, alongside reduced interest earnings, meant that lenders’ profits dropped sharply. But there has been a recovery in the past year with the sector’s cumulative gross profits rising by 66 percent to a record Sh178.8 billion in the 11 months to November 2021.

Moody’s is therefore bullish on banks’ profitability and capital strength in the next 12 to 18 months, and their ability to provide capital.

“High levels of capital, the result of strong earnings, will allow banks to grow and finance new lending opportunities in Kenya and the region,” said the agency.

It also expects the sector’s return on assets—a measure of profitability— to remain healthy at around 2.7 percent in the period, boosted by broadening digitalisation, stable margins, the economic rebound and lower loan-loss provisioning needs.