Global ratings agency Moody’s praises CBK crackdown on banks

Chase Bank depositors outside a Nairobi branch after the lender was put under receivership by the Central Bank of Kenya on April 7, 2016. PHOTO | SULEIMAN MBATIAH 

By CHARLES MWANIKI, cmwaniki@ke.nationmedia.com

In Summary

• Chase Bank, Dubai Bank and Imperial Bank have been put under receivership by Central Bank of Kenya in the past nine months while National Bank of Kenya senior managers have been suspended following a steep rise in the lender’s bad loans.
• The crisis has, however, also raised the possibility of consolidation in the sector through takeovers of smaller lenders by their larger counterparts, which would remove the laggards in the sector without the need to use higher capital requirements as a tool for enforcing consolidation.

Global ratings agency Moody’s has hailed the tighter regulation of banks in Kenya saying it will weed the industry of weaker lenders that could risk the future stability of the sector.

Moody’s assistant vice president and analyst Christos Theofilou cites the placing under receivership of Chase Bank as a positive for the industry arguing it underscores stricter enforcement of prudential guidelines by improving the reporting and corporate governance framework, which should stabilise the banking sector.

Chase Bank, Dubai Bank and Imperial Bank have been put under receivership by Central Bank of Kenya in the past nine months while National Bank of Kenya senior managers have been suspended following a steep rise in the lender’s bad loans.

A number of lenders more than doubled their provisions for non-performing loans for the 2015 financial year as CBK tightened reporting regulations, leading to opinion that some banks had been deliberately under-reporting bad loans in order to keep provisioning down and maintain profit growth.

“Kenya’s banks will benefit from the removal of weaker banks that create systemic vulnerabilities. These banks under-report their problem loans and consequently hold insufficient provisions and capital buffers,” said Mr Theofilou.

“Tighter supervision and enforcement will improve Kenya’s disclosure and corporate governance frameworks and investors’ ability to assess banks’ asset quality and overall risk. Additionally, tighter enforcement compels banks to increase provisions, which will foster system strength.”

READ: Banks back CBK bailout fund for cash starved peers

The fall of Chase Bank has, however, caused jitters in the market, leading CBK to introduce a special borrowing window for small lenders who experience liquidity problems due to external circumstances.

Consolidation

“This action will mitigate small banks’ liquidity risk, and, to a large extent, should prevent a liquidity loss from developing into solvency risk. Often, liquidity risk develops into solvency risk when liquidity-starved banks sell assets at unfavourable prices to create liquidity, negatively affecting their net worth,” said Mr Theofilou.

The crisis has, however, also raised the possibility of consolidation in the sector through takeovers of smaller lenders by their larger counterparts, which would remove the laggards in the sector without the need to use higher capital requirements as a tool for enforcing consolidation.

Already, there are reports that a number of lenders including KCB, Equity Bank, Commercial Bank of Africa, I&M Bank and investment firm Centum, have shown interest in taking over Chase Bank which boasts of a large network of SME customers.

According to Moody’s, another effect of the weakening confidence in smaller banks will be a flight of deposits to tier one lenders which are perceived by the public to be more stable than the rest.

The flight would particularly be centred on uninsured deposits, which constitute about 90 per cent of system deposits.

For instance, the United Nations Sacco, which had Sh850 million locked in Chase Bank following its closure, told members in a memo that it has recalled Sh1.67 billion held in all its fixed accounts with various other banks for safekeeping at KCB.