Equity Bank Limited’s short-term rating upgraded to A1+
GCR has upgraded Equity Bank Limited’s (“Equity” or “the group”) national scale KShs currency short term rating to A1+ (single A one plus), one notch up from the previous rating of A1 (single A one). The national scale KShs currency long term rating was reaffirmed at AA- (double A minus). Equity, previously known as Equity Building Society, commenced operations in 1984. The initial focus was to provide mortgage loans, however, in the 1990s EBS changed its focus to micro-finance to cater for a gap in the market (consisting of un-banked low income groups). Its new found niche led to a conversion into a commercial bank in 2004. Equity is the holding company of the group’s subsidiaries in Kenya, Uganda and Southern Sudan.
The accorded ratings reflect Equity’s established domestic franchise value, improved financial performance and risk appropriate capitalisation cushioning. These are, however, partly offset by the uncertainties surrounding a stable and/or continuing economic recovery (given the impact of a regression). The group is well capitalised, with a total risk weighted capital adequacy ratio of 32% as at FYE10 (FYE09: 33%). Total capital & reserves grew by 14% to KShs29.3bn in F10, bolstered by retained profits. Profitability improved significantly, with the group posting 71% (F09: 5%) growth in NPBT to KShs9bn for F10. Notwithstanding this, income from lending activities was fairly subdued, with net interest income growing by 27% (F09: 39%) despite an expanded loan book. Consequently, net interest income contributed a lower 53% (F09: 58%) of total operating income, impacted by the lower interest rate environment, difficulty in repricing existing loans and increased competition. Conversely, non-interest income grew by 61% (F09: 9%) exceeding expectations and providing a boost to pre-tax earnings. The growth was driven by increased transaction volumes and higher income from bond trading. On the back of tighter lending criteria and an increased portion of write-offs, gross impaired loans contracted 29% to account for a lower 4.5% (F09: 7.7%) of gross advances. Arrears coverage increased to 51% (F09: 47%), with the balance covered by expected cash flows on collateral held. The net NPL and net NPLs/capital ratios dropped to 2.3% (F09: 4.2%) and 5.6% (F09: 9.8%) respectively. Liquidity risk appears well managed, with the bank maintaining an average liquidity ratio of around 41% during F10, which was well above the statutory minimum of 20%. GCR does, however, take note of the group’s expansion plans, which include establishing subsidiaries in Rwanda and Tanzania in F11 and the likely impact on earnings and capital.
Jennifer Mwerenga https://globalratings.net/uploads/files/November_2011.pdf
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