How Kenyan banks performed in H1’24

The first half of 2024 has presented a series of challenges for Kenya's banking sector, marked by high interest rates, rising non-performing loans, and increased debt risks. Moody's recent downgrade of major banks from B3 to Caa1 underscores the sector's vulnerabilities. George Munga, Financial Analyst and Managing Partner at AMG Consulting Group, shed light on the financial health of the sector in a recent interview with CNBC Africa. Munga explained that Moody's downgrade was primarily due to the Kenyan government's inability to push through the 2024-2025 financial bill, leading to concerns about revenue collection and debt repayment. The downgrade of the government consequently affected the repayment risks of companies and commercial banks operating in the country. With most of the government's domestic debt held by commercial banks, any inability to meet obligations impacts the liquidity of these banks, prompting Moody's to adjust their ratings. The challenges faced by the banking sector are deeply intertwined with the overall economic landscape of the country. Examining the performance of Kenyan banks in the first half of the year, Munga highlighted the resilience displayed by these institutions. Major players like Equity Bank, KCB, and Co-op Bank reported significant profit growth compared to the previous year, despite looming challenges. However, the specter of non-performing loans remains a concern. As per IFRS 9 requirements, banks must provision for potential defaults, and the current economic climate in Kenya poses a risk for increased loan defaults among small and medium enterprises. This could potentially impact the financial standing of banks as they head towards the year-end. Munga emphasized the importance of monitoring the situation as the year progresses to gauge the real impact on banks' profitability. In terms of the banking sector's overall financial health, Munga segmented banks into three tiers based on capitalization. Tier one banks, with strong capital bases, have been better equipped to navigate the challenges compared to tier two and tier three banks. While tier one banks have shown resilience, tier three banks have struggled, facing losses and stagnant growth. The prevailing high interest rates, influenced by the Central Bank rate at 13.5 percent, have raised concerns about lending rates and the increased risk of default, especially for small and medium enterprises. The macroeconomic risks, including the government's debt repayment capabilities and upcoming financial measures, will further shape the sector's trajectory in the coming quarters. Munga highlighted that tier one banks, with diversified operations across multiple countries, are likely to weather the storm better than their tier two and tier three counterparts solely dependent on the Kenyan market. The future performance of banks will heavily depend on how macroeconomic risks are managed by the government and financial institutions.