EAC & The Horn

East Africa Bank turns cautious as shareholders face turmoil

East Africa Development Bank’s (EADB) reliance on cheap long-term funds will protect its balance sheet even as it shareholders, the governments of Kenya, Uganda, Tanzania and Rwanda face tough economic conditions.

Rating agency Moodys has affirmed the EADB’s Baa3 long-term issuer rating and maintained the stable outlook on grounds the bank had taken risk mitigation measures rather than on the strength of its shareholders.

Moodys, which recently cut Kenya’s credit rating from B2 to B3 said the country’s negative rating, Rwanda’s B2 stable, Tanzania’s B2 positive and Uganda’s B2 negative means the shareholders are unlikely to intervene if the bank came under pressure owing to their own liquidity challenges.

Holdings of state debt

The downward review of sovereign borrower credit ratings is now hitting state-owned lenders directly even as private lenders anticipate contagion will hit their books through huge holdings of state debt.

“Moody’s assessment of strength of member support balances a large cushion of callable capital with the limited ability of shareholders to provide support given the low ratings of the EADB’s four main shareholders,” the rating agency said.

The developed world unwinding Covid-19 subsidies enjoyed by their populations are causing havoc in developing countries as a sharp rise in interest rates has left sovereign borrowers exposed.

As countries like Kenya face the possibility of defaults with barely enough dollars to meet a couple of months’ worth of vital imports, ratings agency are calling out their risky positions, downgrading their creditworthiness.

Read also: Bank shareholders awaiting dividends get cash calls instead

Facing downgrades

The ripple effect is that banks with direct state ownership are now facing similar downgrades as well as lenders who have too much exposure to the state.

EADB which has learned from previous challenges, has sought to retrofit the institution with reforms to keep loan defaults down and leverage on cheap long-term capital.

Moodys said although the bank’s 10 largest borrowers accounted for 84 percent of their portfolio, the bank’s business model where part of this money was lent by partners to their clients mitigated the risk.

EADB also has a large cushion of callable capital, which stood at almost 1000 percent of total debt in 2022.

However, past delay in the payment of capital contributions suggest that shareholders have limited capacity that constrains willingness to support, although progress has been made on the completion of outstanding subscriptions.

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