By Bella Genga
- IFRS 9 will force lenders to classify bad loans sooner
- Rate caps mean banks will issue bonds at expensive rates
Kenyan lenders risk needing to raise expensive debt on local markets next year to shore up their core capital levels, which may be eroded by new accounting standards the country is introducing that compel banks to classify losses differently.
That’ll be a double whammy for an industry already reeling from the effects of interest-rate caps introduced a year ago, accelerating a decline in banks’ return on earnings to 24.7 percent by the end of last year, down from as much as 30 percent five years earlier, according to Jeremy Awori, chief executive officer at Barclays Bank Kenya Ltd.
The International Financial Reporting Standard 9, or IFRS 9, that comes into effect on Jan. 1 requires banks to set aside more provisions for expected losses even before loan quality deteriorates, rather than when an actual default occurs. This will increase impairments for the lenders and force them to raise fresh capital through debt.
“In certain instances, depending on the quality of their books and level of impairment, they may have to raise more capital,” Awori said in an interview on Sept. 13 in the Kenyan capital, Nairobi. The challenge for local banks will come when they need to raise sub-ordinated debt, which ranks after other forms of borrowings in the event of a failure, which will mean they will “have to go to the capital markets,” he said.
While the unit of Barclays Africa Group Ltd. is “comfortable” with its core capital, it may still raise some debt from within the group so it can “optimize our return and get a better mix between Tier 1 and Tier 2,” he said.
“We’ll do that based on opportunity because you don’t want to just raise sub-debt unnecessarily,” Awori said.
Banks could have to pay more than the 14 percent prevailing commercial interest rate when raising debt if a five-year corporate bond by East African Breweries Ltd. issued earlier this year is anything to go by. The Nairobi-listed Diageo Plc unit offered a 14.17 percent fixed-annual rate for its 6 billion-shilling ($58.3 million) bond.
Lenders hoping the rate cap will be scrapped when a new government is in office may have to wait longer after a Supreme Court nullified the outcome of last month’s election and ordered a fresh vote on Oct. 17. Opposition leader Raila Odinga petitioned the court to cancel the re-election of President Uhuru Kenyatta, saying his Jubilee Party had hacked the electoral agency’s computer systems to ensure a win.
Kenyatta, 55, signed the rates law in September 2016 in fulfillment of electoral pledges to bring down the cost of credit. The move exacerbated dwindling private sector credit, whose growth slowed down to 1.6 percent in June compared with 9 percent a year earlier, according to the Treasury. The cap limits Kenyan bank charges on loans to 400 basis points above the central bank’s benchmark rate, currently at 10 percent.
“It doesn’t matter who’s in government, the status quo cannot remain because even if it’s popular, even if people desire it to remain in place, certain fundamentals will have their impact,” Awori said.