Kenyan banks face forex losses amid shilling's strength

Kenyan banks are facing significant currency losses of approximately Sh50 billion in the first half of 2024 due to the appreciation of the Kenyan shilling against the currencies of its regional subsidiaries. The shilling strengthened by 19 to 31 per cent against the currencies of Uganda, Tanzania, Rwanda, Burundi, and the Democratic Republic of Congo during this period. Willis Nalwenge, Investment Manager at Orient Asset Managers Ltd, discussed strategies to mitigate these forex losses and their broader implications. While the group level is being affected, individual subsidiaries have reported good profitability despite the currency losses being largely paper losses. For example, banks like Equity and KCB have reported double-digit profitability in Kenya shillings, which translates to higher rates when revalued in US dollars. The impact of currency losses on banks is mostly on reporting rather than valuation of loans. Kenyan banks are under scrutiny for foreign exchange risk management, especially regarding currency exchange risk and debt repayment in dollars. The Central Bank of Kenya (CBK) closely monitors banks' USD holdings to ensure adequate coverage, with overall dollar reserves showing a 36.7% year-on-year increase as of April 2024. The strategies employed by banks to mitigate forex risks include spot trades for daily transactions and derivative products like forwards, swaps, and options for large-scale players. Banks use these products to hedge against risks, especially during heavy dollar outflows like petroleum payments. Despite stable currency levels in recent months, the forex losses in February 2024 have impacted banks up to H1 2024. Customers have not seen a significant increase in costs, and loans' valuations are lower, benefiting borrowers. From an investment perspective, stable inflation rates, current reserves, and low import expenses suggest that future forex losses may remain stable. Additionally, access to IMF funding and reduced current account deficit contribute to this stability. Kenyan banks' regional operations are affected by shilling's strength, impacting profitability due to reporting in Kenya shillings. However, banks maintain stability with forex income contributing between 35 to 40% to their profit and loss statements. The long-term forecast for the Kenyan shilling indicates stability with government interventions and a decrease in demand for dollar exchange, leading to a projected range of 121 to 131 shillings against the dollar. Overall, the Kenyan banking sector is adapting to mitigate forex losses and navigate the implications of a strong shilling.