Capital Markets
Kenya’s top banks safe amid global woes, says ratings agency Moody’s
Monday March 20 2023
Police officers leave Silicon Valley Bank’s headquarters in Santa Clara, California on March 10, 2023. US authorities swooped in and seized the assets of SVB after a run on deposits made it no longer tenable for the medium-sized bank to stay afloat on its own. PHOTO | NOAH BERGER | AFP
Rating agency Moody’s has said large local banks are at low risk of instability due to depositor flight compared to their peers in developed markets on high liquidity ratios and stable deposits.
The agency made the comments in the wake of volatility in the global banking sector following the collapse of two tech-leaning US banks last week after suffering panic withdrawals.
The run on Silicon Valley Bank (SVB) was largely linked to fears that losses on its holdings of government bonds following a rise in interest rates had left the bank facing liquidity problems —hence the rush by customers to withdraw their deposits.
Read: Fitch, Moodys to seek CMA nod for local ratings
Signature Bank’s collapse is seen as a mark of the contagion following the fate of SVB.
Moody’s noted that while African banks have also faced erosion in the value of their bond assets due to higher interest rates or yields, their high holdings of liquid assets such as cash and deposits with central banks offer them protection against moderate deposit withdrawals.
In the event of any moderate withdrawals, the agency said, banks can rely on these balances without incurring any losses.
“Recent events in the US have cast a spotlight on risks for banks arising from customer deposit withdrawals, especially for those sitting on significant unrealised losses in their fixed-income bond portfolios. We believe this risk to be low for African banks,” said Moody’s.
“Given the stability of deposits, high volumes of readily available liquidity, and potential liquidity assistance from central banks, we expect most banks will be able to wait for these investments to mature without incurring losses from having to sell them at depressed market values.”
Kenyan banks have in the past year seen a fall of more than Sh60 billion in the paper value of their bond holdings due to the rising interest rates on new government securities.
A rise in yields results in a fall in prices of existing papers, given the reduced demand by investors in the secondary market given that new issuances offer higher rates.
While Kenyan banks have been making downward adjustments in the fair value of their investment securities, they largely tend to hold them until maturity, meaning that the losses are not realised.
Read: Key lessons in failure of America’s SVB
As a result of the rising yields hurting the market value of their bonds, however, banks have been exercising caution when taking on new bonds, contributing to the recent underperformance in bond issuances floated by the Treasury.
