Summary:

• KCB Group, a major player in East Africa’s banking sector, faces financial challenges with a credit downgrade to ‘B’ by Fitch due to increased exposure to government securities and declining asset quality, posing significant hurdles for the group and its subsidiaries.

KCB Group, a key player in East Africa’s banking sector, is facing financial difficulties following a downgrade of its creditworthiness to ‘B’ by the international credit rating agency Fitch. This downgrade is primarily linked to the group’s heightened exposure to government securities and a decline in asset quality. KCB Bank Uganda, a subsidiary, is particularly at risk, given the diminishing creditworthiness of its parent company.

The credit downgrade to ‘B’ signifies an increased risk of default with a limited margin of safety. Fitch’s December statement paints a negative outlook for both KCB Group and KCB Bank Kenya. This is a cause for concern for the Ugandan subsidiary, which received substantial funding in 2022 but is now deemed less creditworthy due to deteriorating assets.

The challenging economic landscape in Kenya, where KCB Bank Kenya holds a prominent position, contributes to the pessimistic outlook. Factors such as elevated inflation, currency depreciation, and public sector arrears have resulted in a surge in non-performing loans (NPLs) in the Kenyan banking sector. KCB Group’s significant holdings in government securities and loans to public sector entities exacerbate these challenges.

Fitch highlights that KCB Group’s asset-quality metrics fall below the sector average, with a regulatory NPL ratio reaching 16.1 percent at the end of Q3 2023. The group foresees the NPL ratio remaining elevated in the medium term, reflecting increased debt-servicing costs in a high-interest-rate environment.

The Ugandan subsidiary faces additional concerns, including the maturity of a Shs33 billion loan acquired from the European Investment Bank in 2017. If KCB Group encounters difficulties in the sovereign credit market, the Ugandan subsidiary may be compelled to repay Shs476 million owed to the parent company as of 2022.

Despite these challenges, KCB Group’s Chairman, Dr. Joseph Kinyua, expresses confidence in the business’s resilience and anticipates sustaining positive momentum. Nevertheless, the credit downgrade and economic challenges present significant obstacles for KCB Group and its subsidiaries.