Treasury cash crunch causes SP to downgrade KCB’s credit rating

KCB, the largest local bank, has become the latest casualty of Kenya’s rapid financial deterioration after a national rating downgrade was extended to the lender.

Global rating agency Standard and Poor’s (SandP) downgraded the bank’s credit outlook to negative from stable, following similar action on the country’s outlook. SandP said its rating criteria does not allow for a company or any other institution to have a higher rating than the national government.

“Under our criteria, we do not rate Kenyan banks above the sovereign because of likely direct and indirect influence of sovereign distress on domestic banks’ operations, including their ability to service their foreign currency-denominated financial obligations,” it said.

The agency revised Kenya’s credit outlook downwards mid-October due to the runaway borrowing that has pushed debt levels higher than earlier forecast.

“Since our last review in April 2015, Kenya’s public finances have deteriorated more than we anticipated, with the 201415 fiscal year end deficit reaching 9.4 per cent of GDP, compared with the 7.3 per cent of GDP we had expected,” it said. “Consequently, general government debt increased beyond our expectations, and we anticipate it will increase to 60 per cent of GDP by the end of the next fiscal year almost 20 per cent of GDP higher than at the end of 2012.”

READ: Fitch puts Kenya on negative outlook as public debt mounts

ALSO READ: CBK raises the red flag over Treasury’s high appetite for debt

SandP said it would only revise KCB’s rating to stable after Kenya’s rating is revised upwards.

KCB said the downgrade was expected but was not a reflection of the bank’s fundamentals: “This is not an indication in any way of KCB’s performance or ability but the sovereign influence on the rating playing its part. 

“All corporate credit ratings are closely related to the sovereign rating. Given Kenya was rated at B+ with a stable outlook by SandP, this presented the ceiling for corporate ratings within the country. With the corporate rating the bank now has, the downgrade at sovereign level will impact the company as it operates within the country.”

Standard Investment Bank head of research Francis Mwangi said if KCB was to issue a bond on the international market it would be expensive since the investors would use the negative ratings to price the offer even though KCB’s fundamentals are strong.

“KCB would be compared with lower graded banks,” said Mr Mwangi.

He added that the since government debt is perceived to have low risk, KCB would have to offer an interest rate that is higher than government debt.

Ecobank Capital head of banking research George Bodo said the downgrade would not have a major impact on the bank though.

“It doesn’t reflect any deterioration in KCB’s balance sheet fundamentals the downgrade was merely triggered by the sovereign downgrade since the latter always supersedes the former. So it comes out as a procedural event.”

ALSO READ: Global rating agencies give KCB Group stable outlook

Other rating agencies have also said the government’s rapacious appetite for debt could lower KCB’s rating.

Moody’s which issued the bank with a B1 rating with stable outlook in September said the rating would go lower if there was further deterioration of Kenya outlook.

“Downward pressure on KCB’s ratings could also develop if there is a weakening of the bank’s funding profile. Finally, the bank’s ratings would also be under pressure if the credit profile of the sovereign were to weaken.”