Kenya’s banking sector set for strong 2022 - Moody's

Kenya's banking sector is poised for a strong performance in 2022, according to a new report from Moody's. The report paints an optimistic outlook for the country's banking system, highlighting expectations of stable fundamentals over the next 12-18 months. Moody's analyst Christos Theofilou provided insights into the key factors driving this positive projection. One of the primary drivers of this positive outlook is the anticipated economic growth of over 5% in the coming year, following the impact of the pandemic. This robust economic rebound is expected to have a positive ripple effect on banks, improving their profitability and loan quality. The report acknowledges that Kenyan banks faced challenges during the pandemic, with both profitability and loan quality deteriorating due to increased losses. However, Moody's anticipates a return to pre-pandemic levels of performance in the near future. High levels of non-performing loans (NPLs) have been a key concern for Kenyan banks, but Moody's forecasts a decline in NPLs to around 12% of total assets over the next 12-18 months. One of the structural challenges facing Kenyan banks is the historically high NPL ratios, reflecting issues such as corporate governance challenges, payment delays, and elevated interest rates in the economy. Despite the improvements expected in NPL ratios, the banking sector still faces significant hurdles in managing credit risk. Furthermore, the report highlights the importance of loan loss provisions for banks in managing risks associated with NPLs. Since the onset of the pandemic, banks have been increasing their provisions to account for potential loan impairments. Moody's expects banks to maintain their provisioning levels even as NPLs decrease, ensuring a strong buffer against credit risks. Liquidity management is another key aspect of the banking sector's performance, with Kenyan banks showing improvements in liquidity levels in recent years. The report notes that banks have increased their liquid assets to total assets ratio from around 25% to over 40% in response to changing market conditions. Despite the current liquidity levels, Moody's expects banks to focus on expanding their loan portfolios as economic conditions improve, potentially leading to a slight decrease in liquidity levels. Overall, Moody's maintains a positive outlook for Kenya's banking sector, emphasizing the resilience and stability of the industry. With expectations of improving profitability, declining NPL ratios, and strong liquidity positions, Kenyan banks are well-positioned to capitalize on growth opportunities in the market.