Moody's changes Kenyan banks outlook to negative

Global ratings agency Moody's has recently adjusted its outlook on Kenyan banks from stable to negative, citing concerns over high volumes of non-performing loans despite solid profitability and liquidity levels. This shift in outlook has raised questions about the impact on interest rates and the need for revenue diversification within the banking sector. In an interview with CNBC Africa, Ronny Chokaa, Senior Research Analyst at AIB-AXYS Africa, shared insights on these pressing issues. Chokaa highlighted the challenges posed by rising interest rates due to monetary policy tightening in both developed and frontier markets. This tightening has led to increased costs of funds for lenders, prompting a race to trim net interest margins. However, the adoption of risk-based credit lending has allowed Kenyan banks to price their loans higher and maintain resilient net interest margins. Despite this, Chokaa cautioned that the peak in government security yields and the anticipated decline could pose reinvestment risks for banks in the future. Looking ahead to 2024, he foresees a persistent elevated cost of funds, leading to potential shrinking net interest margins. To counter this, banks are urged to expand revenue streams through activities like trade finance and foreign exchange trading, as well as adjusting fees and commissions. Additionally, Chokaa addressed the impact of government borrowing on private sector lending. He noted the National Treasury's reduction in domestic borrowing targets, which has eased crowding out of the private sector. This development, coupled with the government's efforts to access international debt markets through euro bond refinancing and issuance, is expected to further alleviate crowding out. Overall, the evolving economic landscape in Kenya calls for proactive measures from banks to navigate the challenges posed by changing interest rates and revenue dynamics.