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Non-performing loans will get worse before economy improves: Moody’s

Moody’s review projects a recovery of the economy in the second half of 2018.

NAIROBI, Kenya, Jun 3 – Non Performing loans are expected to be on the rise in 2018, global rating agency, Moody’s, reports.

In their new report released on Tuesday, Moodys attributes this to hits the economy experienced in 2017 including adverse weather conditions that affected agriculture and a prolonged electioneering period.

By the end of 2017, nonperforming loans reached 10.1 percent of total loans, up from 6 percent at the end of 2015.

Moody’s review, however, projects a recovery of the economy in the second half of 2018.

According to the report Kenya’s Private sector credit growth is expected to remain below 5 percent in 2018 even as it stood at just 2.4 percent in December 2017.

The Agency says despite Kenya’s economic rebound that will help banks to expand loan growth over the next 12-18 months, it currently remains constrained by the government cap on lending rates.

The government has however indicated plans to review the Interest rate capping that was administered in 2016.

“Operating conditions are improving in Kenya, with real GDP growth forecast to rise to 5.6percent this year as business confidence returns and agriculture recovers following last year’s drought,” said Christos Theofilou, a Moody’s Vice President – Senior Analyst. “We expect credit growth to also rebound, but remain low due to tighter bank lending criteria.”

The Agency expects the banks to maintain an average return on assets close to 3.2 percent from 2.67 percent in December 2017.

“Better operating conditions, strong capital and funding profiles will shield Kenyan banks despite high asset risks,” the firm notes.

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Kenyan banks’ profitability is one of the highest regionally and globally, providing a strong recurring buffer against high asset risk.

According to Moodys, Kenyan banks sovereign exposure will remain high over the coming quarters, given the Government’s strong appetite for debt and sluggish private-sector loan growth.

“The rating agency also expects Kenyan banks to maintain their capital buffers and deposit-funded profile – key credit strengths – over the next 12-18 months,” reads the report released Tuesday.

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