Announcements Financial Institutions Rating Alerts

Eastern and Southern African Trade and Development Bank’s international scale issuer rating of BBB placed on Positive Outlook on expected improvement in membership profile, asset quality, and funding diversification

Rating Action

Johannesburg, 21 September 2021 – GCR Ratings (“GCR”) has affirmed Eastern and Southern African Trade and Development Bank’s international scale long and short-term issuer ratings of BBB and A3 respectively while the outlook has been upgraded to Positive. At the same time, the Kenyan long and short-term issuer ratings have been affirmed at AAA(KE) and A1+(KE) respectively with outlook accorded as Stable.

Rated Entity / Issue

Rating class

Rating scale

Rating

Outlook / Watch

Eastern and Southern African Trade and Development Bank

Long term issuer

International

BBB

Positive Outlook

Short term issuer

International

A3

Long term issuer

National

AAA(KE)

Stable Outlook

Short term issuer

National

A1+(KE)

Rating Rationale

The ratings on Eastern and Southern African Trade and Development Bank (‘TDB’, ‘the Bank’) reflect the growing role of the Bank as a key partner for trade and infrastructure development within the region, diverse membership, solid mandate and track record, demonstrated preferential creditor treatment (‘PCT’), strong capitalisation, good risk position, increasingly diverse funding profile and adequate liquidity. The outlook has been revised to positive reflecting our expectations for the Bank’s membership profile to strengthen on the admission of some better rated sovereigns. We also expect asset quality metrics to revert to strong historical levels while funding diversification improves on increased access to global and regional debt capital markets. The ratings are, however, constrained by the significant exposure to high-risk operating environments and the relatively low credit strength of member states.

TDB is a fairly large regional Multilateral Development Bank (‘MDB’), with development related exposures of close to USD6bn as of June 2021. The Bank’s geographical mandate exposes the balance sheet to the high operating environment risks of Eastern and Southern Africa. We believe these risks remain elevated reflecting the direct and indirect impact of the current global pandemic. Positively, the membership base is diverse on a regional basis but also with improving penetration in non-regional markets including the recent admission of Denmark. In addition, solid track-record of preferred creditor treatment is ratings positive, reflecting the relevance and importance of this institution to its shareholders.

The Bank has a mandate to promote social and economic development in the region through trade and infrastructure projects. Its key franchise strength, being a predominant financier of trade finance transactions in Oil & Gas and Agriculture industries in the region, is a strong underpin of its influential status. Furthermore, the Bank’s Board of Governors approved a General Capital Increase (‘GCI’) of USD1.5bn and doubled authorised share capital to USD6bn in 2020, reflecting the growing systemic importance of the Bank. The GCI positions the Bank for undertaking its countercyclical role including responding to the COVID-19 pandemic and we already view the mandate as having clear and measurable developmental outcomes which the Bank has positively tracked over the last couple of years.

Capitalisation is ratings positive. The GCR leverage ratio measured just above 19% at FY20 down from 20% at half year although we expect the ratio to rebound 100-150 bps above the 20% target over the next 12-18 months, balancing capital increases, better earnings and modest loan growth. Earnings performed better than our expectations in FY20, with the Bank managing to grow its bottom line by c.4% thanks to the lower cost of funds and stronger yield from treasury assets. We expect firm earnings growth over the next 2 years as we think the limited credit deterioration in the loan book (reflected in the resilience to date and normalising economic activities from successful vaccine rollouts) will see the Bank release impairment provisions front loaded in 2020 due to the pandemic. In addition, projected interest rate hikes and contained cost of funds will support net interest income growth. We provide uplift to the capital score for the risk participation program protecting c.50% of the Bank’s loan book. The loan loss reserve coverage of 81% at HY21 is considered appropriate given the highly collateralised loan book and minimal clean risk lending.

Risk position is ratings positive, supported by well contained credit losses and non-performing loans (‘NPLs’) that compare favourably to rated peers. Cost of risk increased marginally to 1.2% from prior year, while NPLs increased in line with expectations to 2.9% at FY20. We expect cost of risk to decrease to below 1% in 12-18 months, while NPLs marginally decrease. Asset quality metrics have sustained at good levels due to the strong performance of the loan book which has significant exposure in trade finance facilities that are more secure and short term. In addition, the Bank’s major credit counterparties are sovereigns which have proven to have relatively lower defaults and strong recovery prospects. The Bank’s risk participation program (currently USD750m) via a first loss guarantee provided by highly rated international financial institutions is considered ratings positive. Furthermore, high quality collateral comprising cash, insurance by A or better rated international insurers, and sovereign backed receivables secures close to 90% of the book. To the downside, loan concentrations are relatively high in comparison to rated peers, with top 20 exposures accounting for c.81% of the total loan book at HY21. Nonetheless, this may change as the Bank diversifies into markets of new member states.

Funding structure is stable, consisting of increasingly diversified funding sources from international debt capital and loan syndication markets. The recent Eurobond issue which attracted the lowest cost and longest tenor in the history of the Bank’s debt capital market transactions is viewed positively. We expect the funding and liquidity profile of the Bank to benefit from regular issuance of competitively priced regional and global bonds in large sizes and longer maturities (as the recently issued) we believe will improve access and stability of funding sources. Liquidity is good, supported by the short-term trade finance facilities and the Bank’s sovereign portfolio (63% of the loan book) which has shown some resilience and repayment obligations continue to be honoured despite the COVID-19 strain. Liquid assets to total assets measured at 25% at HY21, while the liquidity coverage ratio for the Bank’s projected cash needs for the next 18 months was 1.4x over the same period.

We provide uplift to the ratings for callable capital. Qualifying callable capital from A- and above shareholders including insurance by highly rated counterparties covers net debt by about 27% as at FY20.

Outlook Statement

The outlook is positive reflecting our expectations for the Bank’s membership profile to strengthen on the admission of some better rated sovereigns in the next couple of years. We also think asset quality will revert to historical levels as the anticipated gradual normalisation of economic activities from the successful rollout of COVID-19 vaccines will result in the Bank releasing impairment provisions booked in the prior year. Alongside the above, the Bank’s importance and relevance to its shareholders remains high in our opinion and we expect to see a continuance of mandate fulfilment and strong balance sheet supported by low credit losses, coupled with capital and liquidity managed within adequate to strong levels.

Rating Triggers

The ratings may be raised if the quality of membership improves, alongside a growing development book, that improves geographic and sectoral concentrations. Furthermore, for ratings to go up, we would want to see, credit losses managed below 1%, and increased long term funding diversification, from regional and international debt markets. The ratings could be lowered if capital deteriorates, credit losses exceed our expectations, and/or there is an increase in funding and liquidity risks.

Analytical Contacts

Primary analyst

Simbarake Chimutanda

Financial Institutions Analyst

Johannesburg, ZA

SimbarakeC@GCRratings.com

+27 11 784 1771

     

Committee chair

Matthew Pirnie

Group Head of Ratings

Johannesburg, ZA

MatthewP@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Supranational Institutions, May 2019

GCR Ratings Scale, Symbols & Definitions, May 2019

GCR Country Risk Scores, August 2021

GCR Financial Institutions Sector Risk Score, September 2021

Ratings History

Eastern and Southern African Trade and Development Bank

Rating class

Review

Rating scale

Rating class

Outlook

Date

Long term issuer

Initial

International

BB

Stable

November 2004

Short term issuer

Initial

International

A3

December 2019

Long term issuer

Last

International

BBB

Stable

October 2020

Short term issuer

Last

International

A3

October 2020

Long term issuer

Initial

National

AA(KE)

Stable

November 2004

Short term issuer

Initial

National

A1(KE)

November 2004

Long term issuer

Last

National

AAA(KE)

Stable

October 2020

Short term issuer

Last

National

A1+(KE)

October 2020

Risk Score Summary

Rating Components and Factors

Risk score

 

 

Operating environment

11.50

Country risk score

2.50

Sector risk score

2.50

Membership Strength and Diversity

3.00

Preferential Creditor Treatment

3.50

   

Business profile

5.00

Status and diversity

2.00

Mandate and track record

3.00

Management and governance

0.00

 

 

Financial profile

5.50

Capital and leverage

3.50

Risk

1.00

Funding structure and liquidity

1.00

   

Comparative profile

1.00

Callable capital

1.00

Peer analysis

0.00

   

Total Score

23.00

Glossary

Capital

The sum of money that is invested to generate proceeds.

Cash

Funds that can be readily spent or used to meet current obligations.

Cash Flow

The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.

Credit Rating

An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.

Debt

An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.

Liquidity

The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to TDB. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

TBD participated in the rating process via virtual management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from TDB and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2020;
  • Breakdown of loan book and funding as at June 2021;
  • Latest internal and/or external audit report to management;
  • Industry comparative data.
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