KCB Group, a major player in East Africa’s banking sector, is encountering financial challenges as its creditworthiness is downgraded to ‘B’ by international credit rating agency Fitch. The downgrade is attributed to the group’s increased exposure to government securities and a decline in asset quality. KCB Bank Uganda, a subsidiary, is particularly vulnerable as its parent company’s creditworthiness diminishes.
The credit downgrade to ‘B’ suggests a heightened risk of default with a narrow margin of safety. Fitch’s December statement indicates a negative outlook for both KCB Group and KCB Bank Kenya. This raises concerns for the Ugandan subsidiary, which received significant funding in 2022 but is now considered less creditworthy due to deteriorating assets.
The challenging operating environment in Kenya, where KCB Bank Kenya holds a prominent position, contributes to the negative outlook. Factors such as elevated inflation, currency depreciation, and public sector arrears have led to a rise in non-performing loans (NPLs) in the Kenyan banking sector. KCB Group’s substantial holdings in government securities and loans to public sector entities further compound the challenges.
Fitch notes that KCB Group’s asset-quality metrics are weaker than the sector average, with a regulatory NPL ratio reaching 16.1 percent at the end of Q3 2023. The group expects the NPL ratio to remain high in the medium term, reflecting increased debt-servicing costs in a high-interest-rate environment.
The Ugandan subsidiary faces additional concerns, including a maturing loan of Shs33 billion acquired from the European Investment Bank in 2017. If KCB Group encounters difficulties in the sovereign credit market, the Ugandan subsidiary may be obligated 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. However, the credit downgrade and economic challenges pose significant hurdles for KCB Group and its subsidiaries.
