Loan default risk worse than indicated by CBK – report

The cost of risk for Kenya’s banking sector is set to rise as asset prices continue to be impacted by the current economic environment.

In a post-Monetary Policy Committee (MPC) analysis, global financial research firm-Tellimer termed the increase in restructured loans as ‘worrying sign for banks’ saying it increases the risk of defaults down the line.

"The rapid increase in restructured loans is a concern as it increases the risk of defaults down the line, in turn driving up the cost of risk for banks as they seek to adapt to a weaker economic environment, "Faith Mwangi, equity research analyst at Tellimer said.

According to the Central Bank of Kenya (CBK), at least Sh844.4 billion of loans were restructured by end of June, in line with the emergency measures announced by the apex bank on March 18, to cushion borrowers from adverse effects of Covid-19.

The amount accounts for 29 per cent of banking sector loan book estimated at Sh2.9 trillion.  

The amount of restructured loans has more than tripled since April when only seven per cent of the banking sector loan book or Sh176 billion was rescheduled following CBK’s directive. It has also more than doubled compared to May.

According to CBK, personal loans worth Sh240 billion accounted for 30 per cent of gross restructured loans, an indication of just how the Covid-19 pandemic has hampered income for households.

For other sectors, a total of Sh604.4 billion had been restructured mainly to trade (22.9 per cent), real estate (19.5 per cent), transport and communication (16.3 per cent) and manufacturing (14 per cent).  

The loan restructuring directive extended some relief to banks by the lowering of the commercial bank cash reserve ratio to 4.25 per cent which saw CBK set aside Sh35.2 billion cash flow to banks.

On Wednesday last week, CBK said 89.1 per cent of the amount has already been used to support lending, especially to the tourism, transport and communication, real estate, trade and manufacturing sectors.

''We believe the loans that are already under pressure in the current weak economic environment are loans that may later be unable to make the requisite payments and become non-performing,’’ analysts at Tellimer said.

According to the regulator, the non-performing loans ratio was 13.1 per cent in June compared with 13 per cent in May.

Analysts said that although the figure has not changed much, they regard it as an inaccurate representation of banks' asset quality.

''In our view, the restructured loan data is closer to reality, given the CBK is only allowing for restructurings on loan facilities that have faced strain from the impact of Covid-19,’’ the report said.

The pandemic had no impact on lenders’ earnings in the first three months of the year but projected effects to reflect in the half-year results expected this month.

Similar sentiments have been shared by Tellimer which expect banks to increase the cost of risk to reflect the weakened outlook on these loans.

''Across the banking sector, there has been no uniformity on loan loss provisions for restructured loans, but we expect to able to provide an update on that after the Q2 results season,’’ the report said.