Kenyan banks increase demands for collateral in fragile housing market

A crane on a skyscraper construction site, Nairobi, Kenya.
Source: Nirian / iStock / Getty Images Plus

The exposure of Kenyan banks to real estate has led lenders to demand more collateral from clients amid fears of a collapse in the real estate industry.

A dozen Kenyan banks hold real estate guarantees totaling $ 37.1 billion, according to a recent report by Egyptian investment bank EFG Hermes which warns that lenders are among the most exposed to a correction in house prices.

Banks have now asked borrowers to provide more collateral if the value of their existing collateral depreciates, Dr Samuel Tiriongo, director of research and policy at the Kenya Bankers Association, told S&P Global Market Intelligence.

“The frequency of revaluations would vary from bank to bank, depending on the internal policy of each bank,” Tiriongo said. “In most cases, and in experience, reassessments would take place every two or three years.”

“Stagnant” real estate market

Land prices have fallen significantly from their 2017 high as the lack of potential buyers and tenants for commercial and residential properties depresses valuations. The office vacancy rate in Nairobi more than doubled between 2011 and 2020 to reach 22.3%, notes EFG.

“Structural changes are needed to improve the outlook, which appears stagnant at best,” EFG wrote, adding that the banks were particularly exposed.

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Mortgage loan guarantees are likely to be around 50 to 70 percent of asset value, according to Eric Musau, research manager at Nairobi-based Standard Investment Bank.

Banks want borrowers to increase collateral following falling property and land valuations to ensure that they always exceed the value of the loan, thus providing sufficient cushion for their facilities, Musau said.

“If the banks have a margin of around 30% to 40% and then the value goes down so that that buffer falls below, say, 10%, it becomes a concern for them, especially when you consider that the interest may increase the total amount. payable fairly quickly, ”said Musau.

Moratoriums on loans to help borrowers during the pandemic have reduced interest income for banks, adding to their concerns about falling house prices, especially with slowing sales in some market segments.

Equity investors will overweight banks that obtain sufficient additional collateral from borrowers to cover home loans and reduce their exposure to banks that fail to reduce the risk associated with their home loans, said Ann Wacera, analyst. principal investment at Cytonn Investments in Nairobi.

“The bigger banks are better able to do this, so they should benefit from it, and the smaller banks will be in a lose-lose situation,” she said.

As of September 30, 16% of Equity Group Holdings PLC’s assets were real estate, while KCB Group PLC’s real estate, construction and construction loans represented 25% of its total portfolio at the end of 2020, according to EFG Hermes. Equity Group and KCB are the two largest banks in Kenya by the size of their assets.

It’s hard to say that banks have lent too much to the real estate industry, according to Musau.

“It’s on a case-by-case basis, and there is still room for lending to the sector to expand,” Musau said.

KCB and Equity Group did not respond to requests for comment.

Problem loans at Equity Group Holdings PLC, KCB Group PLC, The Co-operative Bank of Kenya Ltd. and NCBA Group PLC accounted for between 10.05% and 17.01% of total loans at the end of the third quarter of 2021, with the sector- the ratio of non-performing loans increased from 3.46% to 12.91% between 2012 and 2020. The increase in bad debts is in part due to stricter accounting standards, including the global accounting standard IFRS 9, which has forced banks to reclassify more loans as non-performing, as well as COVID-19, according to Musau.

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Meanwhile, the overall net interest margin of Kenyan banks – the difference between interest income generated and interest paid to depositors – declined to 6.81% in 2020 from 8.22% in 2012, according to the Market Intelligence data. The overall return on average equity – a measure of profitability – fell to 10.72% from 24.72% during the same period.

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Bank revenues recovered in the third quarter of 2021, as the Kenyan economy recovered. Equity Group’s net interest income increased from KSh 39.31 billion to KSh 48.48 billion shillings one year earlier. KCB’s net interest income rose to 56.44 billion shillings from 47.86 billion shillings the previous year, and that of the Co-operative Bank of Kenya fell from 23.6 billion shillings to 28.6 billion shillings. , 7 billion shillings.

KCB said in its third quarter earnings release on November 17 that it expected “a stronger year 2022 and a more sustained recovery.”

NCBA Group PLC and The Co-operative Bank of Kenya Ltd. also did not respond to requests for comment.

As of December 17, US $ 1 was equivalent to Kenyan shillings 113.05.