Banks exposure to GoK debt cut to a decade low

Local Kenyan lenders are holding the smallest portion of state debt in almost ten years as banks dump government securities on rate hikes, heightened risk of default and the possibility of restructuring.

Central bank data shows the portion of domestic debt held by banks stood at 45.64 percent in April down from 54.8 percent in June 2020.  

The last time banks held less than 50 percent of domestic debt was 49.4 percent in March 2014, and have been accumulating risk free state debt over the decade, (especially during the rate cap era) to a high of 57.8 percent in July 2015.

Kenyan banks hold Kes2 trillion in government debt led by KCB Bank which holds Kes253.3 billion followed by NCBA Bank with Kes222.4 billion and Equity Bank at Kes219.1 billion as per the lenders December financial accounts.

Cooperative Bank holds Kes173.2 billion in government paper in line with international lenders like StanChart which has Kes104.7 billion state debt, Absa Kes90.5 billion and Stanbic Kes57.9.

The Central Bank of Kenya has raised interest rates by 200 basis points since mid 2022 to 9.5 percent in March this year sending the value of bonds plummeting. 

Since CBK imposed a jumbo rate hike in March all bonds issued have performed dismally as banks stay away from long term bonds which has cut their exposure to the state. 

An infrastructure bond in early March yielded 119.5 percent performance rate but a reopened infrastructure bond later in the month only yielded 64 percent participation. 

Participation fell to 17.8 percent in April and down to 14.3 percent before the Central bank of Kenya cancelled a 30 year bond after receiving only Kes7.3 billion bids of which only Kes1.7 billion could be taken up. 

IC Group Economist Churchill Ogutu says the expectation for rate hikes has dampened appetite for state bonds at current prices even as the economy recovers offering banks an opportunity to lend to the private sector instead.

Kenyan businesses have witnessed a double-digit credit growth over the last one year to March as the economy made recoveries from the shock of ovid-19 and the war in Ukraine.

Banks have also increased loans to the private sector after the regulator started approving risk-based pricing that have seen base lending rates rise above 13 percent in February for the first time since July 2018 according to CBK data.  

But lending to the public comes with the risk of default as non-performing loans rose to 14 percent of all loans in February up from 13. 3 percent in December last year.

Banks see this risk can be mitigated by a mix of higher borrowing rates, guarantees from development partners and the fat that small borrowers especially pay their debts. 

Analysts however suggest that when it comes to the government, default is unlikely but Banks risk being forced to restructure their debts. 

A study by Pangea Risk and Impact Capital suggests that Kenya is likely to restructure its loans to lengthen maturities which may hit local bond holders.

“By the end of 2023, heavily indebted African states like Kenya and Ghana, will have followed the three-year-old example set by Angola and have implemented successful debt restructurings through extended maturities on foreign currency obligations, domestic loan swaps in exchange for concessional finance, and limited haircuts for some bondholders,” the study by Robert Besseling Faisal Khan read. 

Mr Ogutu, however, believes Kenya is not likely to default given Kenya is already under an International Monetary Fund Programme unlike Ghana which had to negotiate a programme that required local debt restructuring.

He said unlike Ghana, Kenyan authorities are also confident of getting dollar flows from a syndicated loan, the IMF and the World Bank that will be sufficient to cover debt repayments.

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