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Rating Action:

Moody's downgrades the ratings of three Kenyan banks, concluding their review

15 Feb 2018

Rating actions follow downgrade of the Kenyan sovereign rating

Limassol, February 15, 2018 -- Moody's Investors Service ("Moody's") has today downgraded to B2 (stable outlook), from B1 (Rating Under Review outlook), the long-term local currency deposit ratings of three Kenyan banks: KCB Bank Kenya Limited (KCB Bank), Equity Bank Kenya Limited (Equity Bank), and Co-operative Bank of Kenya Limited (Co-op Bank). Moody's has also downgraded the baseline credit assessments (BCAs) of the three banks to b2, from b1.

Today's rating actions conclude the review for downgrade initiated on 4 October 2017 on the three Moody's-rated banks, and follows the weakening of the Kenyan government's credit profile, as captured by Moody's downgrade of the sovereign rating on 13 February 2018. For further information, please see the sovereign press release "Moody's downgrades Government of Kenya's issuer rating to B2 and assigns stable outlook". Although Moody's notes that rated Kenyan banks' credit profiles are underpinned by strong capital and profitability metrics as well as solid deposit-based funding profiles, the rating agency views the sovereign credit profile as a key factor driving banks' creditworthiness given their elevated balance sheet exposure to the sovereign.

Bank specific details and a full list of the banks' other ratings affected by today's rating actions is provided below.

RATINGS RATIONALE

WEAKENING CREDIT PROFILE OF THE KENYAN GOVERNMENT

Today's rating actions are primarily driven by Kenya's sovereign rating downgrade to B2 stable, from B1 Rating Under Review. The banks' high sovereign exposure, mainly in the form of government debt securities held as part of their liquid assets, links their credit profile to that of the government. In view of the correlation between sovereign and bank credit risk, these banks' standalone credit profiles and local currency deposit ratings are constrained by the B2 rating of the government.

Although Kenyan banks face challenges in the operating environment that lead to elevated asset risks, particularly for the small and medium-sized (SME) enterprise segment, Moody's notes the recent resilience demonstrated by rated banks, supported by high capital and profitability metrics, and a deposit-based funding profile. See below for bank specific details.

NOTCHING CONSIDERATIONS

Moody's notes that the B2 long-term local currency deposit ratings of the three banks are in line with their BCAs of b2, which in turn are at the same level as Kenya's B2 rating.

The B3 long-term foreign-currency deposit ratings of the three banks are constrained by Kenya's country ceiling for such foreign-currency deposits and reflect foreign-currency transfer and convertibility risks.

NATIONAL SCALE RATINGS (NSRs)

Moody's NSRs are generated by mapping from the local-currency global scale ratings using country-specific maps. For Kenya, a global-scale rating of B2 maps to Aa3.ke-A2.ke on the national scale, compared to a range of Aaa.ke-Aa2.ke previously under a B1 global-scale rating. Equity Bank's and Co-Op Bank's Aa3.ke/KE-1 NSRs map at the higher end of the corresponding range, indicating that these banks' credit profiles are strongly positioned compared with other domestic issuers.

INDIVIDUAL BANKS' MAIN RATING DRIVERS

- KCB Bank Kenya Limited

KCB Bank's b2 BCA, B2 long-term local-currency deposit ratings and B2 issuer ratings capture the high inter-linkage between the bank's own credit profile and that of the B2 rated sovereign, given the bank's high exposure to the sovereign through its holding of government securities standing at around 1.1x its tangible common equity, according to its financial disclosures as of September 2017.

Additionally, KCB Bank Kenya's ratings capture the bank's (1) solid profitability metrics with a net income at 3.5% of tangible assets (during the first nine months of 2017), supported by a strong domestic franchise, (2) high capital metrics, with tangible common equity of 15.3% its total assets as of September 2017, and (3) stable deposit-based funding structure. These strengths are balanced against the challenges in the operating environment that lead to high problem loans at 7.3% (excluding interest in suspense) of gross loans as of September 2017, above its rated domestic peers.

- Equity Bank Kenya Limited

Equity Bank's b2 BCA and B2 long-term local-currency deposit ratings capture the inter-linkage between the bank's own credit profile and that of the B2 rated sovereign, given the bank's high and increasing exposure to the sovereign through its holding of government securities at around 1.9x its tangible common equity, according to its financial disclosures as of September 2017.

Equity Bank's ratings also capture its (1) strong brand recognition, established domestic franchise and extensive use of alternative distribution channels, which support high and resilient profitability with a net income at 4.2% of tangible assets during the first nine months of 2017; (2) solid liquidity buffers, with liquid assets at 40% of total banking assets as of September 2017, and (3) resilient funding profile, with a granular retail depositor base. These strengths are balanced against challenges in the environment that lead to elevated asset risks, particularly for the SME segment (61% of group loans as of June 2017). Equity Group's asset quality metrics (a good proxy for Equity Bank's ratios) have weakened, with Moody's estimated problem loans (excluding interest in suspense) to gross loans at 6.5% as of September 2017, from 2.7% as of end-2015.

- Co-operative Bank of Kenya Limited

Co-op Bank's b2 BCA and B2 long-term local-currency deposit ratings reflect the inter-linkage of the bank's own credit profile and that of the B2 rated sovereign, given the bank's high exposure to the sovereign through its holding of government securities at around 1.0x its tangible common equity, according to its financial disclosures as of September 2017.

In addition, Co-op Bank's ratings capture its (1) established domestic franchise, extensive use of alternative distribution channels, and improving operational efficiency, which support its profitability with a net income at 3.3% of tangible assets during the first nine months of 2017; (2) improving funding profile that benefits from a diversified depositor base; and (3) high capital levels with a tangible common equity at 16.9% of total assets as of September 2017. These strengths are balanced by the challenges in the operating environment that lead to elevated asset risks, as reflected by the recent weakening in the bank's problem loans (excluding interest in suspense) to 6.2% of gross loans as of September 2017, from 4.5% as of June 2017.

STABLE OUTLOOK

The banks' global long-term deposit ratings carry a stable outlook, which balances the risks in the operating environment, against the banks' strong loss-absorption buffers and the stability afforded by their retail funded deposit base.

WHAT COULD MOVE THE RATING -- UP/DOWN

Positive pressure could be exerted on all three banks' ratings following an improvement in the country's operating environment and an improvement in the banks' asset quality metrics. However, any upgrade of the banks' ratings would need to be preceded by an upgrade in Kenya's sovereign rating and foreign currency deposit ceiling.

Negative pressure could be exerted on the banks' ratings if there is a deterioration in the overall operating environment leading to a weakening in the banks' profitability, capitalization and credit risk profiles.

LIST OF AFFECTED RATINGS

Issuer: Co-operative Bank of Kenya Limited

Downgrades:

....LT Bank Deposists (Local Currency), Downgraded to B2 from B1, Outlook changed To Stable From Rating Under Review

....LT Bank Deposists (Foreign Currency), Downgraded to B3 from B2, Outlook changed To Stable From Rating Under Review

....NSR LT Bank Deposists, Downgraded to Aa3.ke from Aa2.ke

....Adjusted Baseline Credit Assessment, Downgraded to b2 from b1

....Baseline Credit Assessment, Downgraded to b2 from b1

....LT Counterparty Risk Assessment, Downgraded to B1(cr) from Ba3(cr)

Confirmations:

....NSR ST Bank Deposits, Confirmed at KE-1

Affirmations:

....ST Bank Deposits, Affirmed NP

....ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Stable From Rating Under Review

Issuer: Equity Bank Kenya Limited

Downgrades:

....LT Bank Deposits (Local Currency), Downgraded to B2 from B1, Outlook changed To Stable From Rating Under Review

....LT Bank Deposits (Foreign Currency), Downgraded to B3 from B2, Outlook changed To Stable From Rating Under Review

....NSR LT Bank Deposits, Downgraded to Aa3.ke from Aa1.ke

....Adjusted Baseline Credit Assessment, Downgraded to b2 from b1

....Baseline Credit Assessment, Downgraded to b2 from b1

....LT Counterparty Risk Assessment, Downgraded to B1(cr) from Ba3(cr)

Confirmations:

....NSR ST Bank Deposits, Confirmed at KE-1

Affirmations:

....ST Bank Deposits, Affirmed NP

....ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Stable From Rating Under Review

Issuer: KCB Bank Kenya Limited

Downgrades:

....LT Issuer Rating (Local Currency), Downgraded to B2 from B1, Outlook changed To Stable From Rating Under Review

....LT Issuer Rating (Foreign Currency), Downgraded to B2 from B1, Outlook changed To Stable From Rating Under Review

....LT Bank Deposits (Local Currency), Downgraded to B2 from B1, Outlook changed To Stable From Rating Under Review

....LT Bank Deposits (Foreign Currency), Downgraded to B3 from B2, Outlook changed To Stable From Rating Under Review

....Adjusted Baseline Credit Assessment, Downgraded to b2 from b1

....Baseline Credit Assessment, Downgraded to b2 from b1

....LT Counterparty Risk Assessment, Downgraded to B1(cr) from Ba3(cr)

Affirmations:

....ST Issuer Rating, Affirmed NP

....ST Bank Deposits, Affirmed NP

....ST Counterparty Risk Assessment, Affirmed NP(cr)

Outlook Actions:

....Outlook, Changed To Stable From Rating Under Review

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in September 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060333.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Christos Theofilou
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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