Local banks feel the pinch of holding too much state debt

Local banks feel the pinch of holding too much state debt. The Kenyan government’s junk ratings has taken a shine off local banks which carry exceptionally huge Treasury bills and bonds.

Moody’s Investors Service has downgraded three Kenyan banks – KCB Group, Equity and Co-operative following the weakening of the credit profile of the government.

“Moody’s Investors Service has downgraded to B2 (stable outlook), from B1 (rating under review outlook), the long-term local currency deposit ratings of three Kenyan banks: KCB, Equity Bank Kenya, and Co-operative Bank),” said Moody’s.

While Treasuries are usually considered risk free, their quality depends on the issuer. Moodys downgraded Kenya’s overall ratings to B2 from B1, local debts from B2 to B3 and foreign loans from Ba2 to Ba3.

Ratings on government debt will have a big implication on lenders under the International Financial Reporting Standard (IFRS9) which came into effect this year.

Banks will have to set aside part of their profits to cater for the risk of default for an individual, corporate and even a sovereign like the government, however, small the risk.

Kenyan banks were however spared the aftershocks of new provisions for bad debts under new guidelines released for industry consultations.

The Central Bank of Kenya said it would give banks five years in which to factor in additional provisions.