Kenyan banks to continue reporting strong pre-impairment operating profits, sufficient to absorb a potential increase in the cost of risk in 2024.
Kenya’s annual inflation is expected to ease to 6.8 per cent in 2024 and the monetary policy rate to follow the trend, the rating firm Fitch predicts in its African Banks Outlook 2024.
Inflation peaked at 9.2 per cent in March 2023, and the Central Bank of Kenya increased the Central Bank rate by 175 basis point in the first half of 2023 to 10.5 per cent, the highest level for the past seven years.
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Fitch expects Kenyan banks to continue reporting strong pre-impairment operating profits in the higher interest-rate environment, sufficient to absorb a potential increase in the cost of risk.
According to the firm, the strong economic growth (real GDP growth of 5.5 per cent in 2024) and only moderate credit penetration should remain supportive of healthy loan growth.
The firm expects the bad loans ratio to increase by end-2023 due to delayed repayments by government contractors and parastatals and increased debt-servicing costs, before the trend reverses in second half of 2024.
Retail loans will also be pressured by high interest rates and a decline in real disposable income following the recent tax hikes. Larger banks’ earnings will benefit from overseas operations given the depreciation of the shilling. Large Capital Buffers We expect banks to maintain high capital buffers in light of asset quality and operating environment risks.
“African banks will continue to face significant challenges in 2024, including risks of sovereign debt distress, potential currency depreciation, subdued global growth, overall rising impairments, and increasing social unrest and political risks. These will, to some extent, be offset by high commodity prices,” noted Eric Dupont, Head of African Banks.
“Banks will remain exposed to domestic and global operating environment risks, but most countries are showing a good degree of resilience, supported by high commodity prices. GDP growth will generally remain moderate, with no major African economy set to face recession, and our base-case expectations for 2024 do not look worse than in 2023,” he added.
Rating Outlook Distribution Just over 70% of African banks’ Long-Term Issuer Default Ratings (IDRs) are in the highly speculative ‘B’ range, which, according to Fitch’s definition, indicates that a material default risk is present, but a limited margin of safety remains. Three quarters of African banks’ Long-Term IDRs are driven by their Viability Ratings (VRs; our assessment of standalone creditworthiness) and 86% of these are in line with their respective sovereigns.
Banks’ good headroom means that 74% of rating Outlooks are Stable; the other 26% are Negative, half of which are due to Negative Outlooks on the sovereign ratings. Further sovereign downgrades could trigger bank rating downgrades, especially for banks that are rated in line with the sovereign. African banks generally do not meet Fitch’s criteria to be rated above the sovereign.