Kenyan Banks Seen Sheltering in Bonds as Virus Slows Lending

NAIROBI (Capital Markets in Africa) — Kenya’s banks are likely to issue fewer loans this year and boost investments in government debt to safeguard earnings under threat from the fallout of the coronavirus.

That’s the assessment of some analysts after the East African nation’s lenders released first-quarter results that showed lower profit, a surge in loan-loss provisions and a wave of debt restructurings. An economic slowdown is reducing demand for credit, leaving banks with little choice but to buy high-yielding almost risk-free government bonds to compensate for the loss of income.

“In terms of strategy, it’s a no brainer,” said Bernard Kiarie, regional banking sector head at African Alliance Kenya Investment Bank. “You can’t write new loans because I don’t know which sector isn’t risky right now.”
Four interest rate cuts is weighing on the income banks make from lending. The drop in borrowing costs will encourage lenders to buy shorter-dated securities, where yields are higher, he said.
Read more: African Banks Find Solace in 12% Bond Yields as Loans Dry Up

To offset threats to their revenue, the country’s largest banks will use their scale to drive high-volume, low-margin business, said Renaldo D’Souza, head of research at Nairobi-based Sterling Capital Ltd. Smaller ones will have to settle for modest loan-book growth to avoid taking on too much risk.

“We expect an increase in provisions in the next three quarters,” D’Souza said. “Something else that will affect the financial performance of banks is that they are restructuring loans and this translates into loss of interest income.”

Equity Group Holdings Plc and KCB Group Ltd, the two biggest lenders, restructured loans of 92 billion shillings ($861 million) and 110 billion shillings respectively in the first quarter. Provisions at Equity Group soared over sevenfold in the first quarter and more than doubled at KCB Group. The industry restructured the equivalent of 9.6% of its loan books by April, according to the central bank.

Standard Chartered Kenya Plc on Friday reported a 17% decline in first-quarter profit as lending revenue dropped, provisions rose and it restructured 22 billion shillings of loans.

“With the bank still keen on its conservative strategy, growth prospects for the bank will remain dim, especially with the existence of more aggressive players in the retail segment,” Nairobi-based Genghis Capital said about Standard Chartered Kenya in a note. It retained its hold recommendation on the stock because of a dividend yield among the most attractive in the industry.

NCBA Group Plc, Kenya’s second-biggest lender by customers and deposits, doesn’t expect much loan growth although deposits will probably increase, Chief Executive Officer John Gachora said earlier this month.

“We shall continue to put our money where it is possible and where it is low-risk — like in government paper,” he said. In addition, NCBA is actively lending to other banks through the interbank market.