Johannesburg, 1 July 2015 — Global Credit Ratings has today assigned national scale ratings to Commercial Bank of Africa Limited of A+(KE) and A1(KE) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until June/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Commercial Bank of Africa (“CBA” and/or “the group”) based on the following key criteria:
CBA’s ratings are underpinned by its well-established regional franchise (supported by a long operating history) and standalone credit profile, which reflects adequate capitalisation, good profitability, satisfactory asset quality and sound liquidity. CBA has regional presence, with cross border banking subsidiaries in Uganda and Tanzania, collectively accounting for approximately 11% of group assets at FYE14 (FYE13:15%).
Capitalisation has remained strong, despite high asset growth. In F14, the group’s capital base was boosted by a fresh equity infusion of KES2.1bn through a rights issue, the issuance of KES7.0bn in subordinated debt, as well as the maintenance of a 50% dividend payout policy, which continues to support profit retention. As a result, the group’s total capital adequacy ratio rose to 17.9% at FYE14 (FYE13: 13.5%), against a new statutory requirement of 14.5%. The group boasts a well-funded balance sheet, and maintains sound liquidity buffers, evidenced by a liquidity ratio which has constantly stood well in excess of both the prudential liquidity requirement of 20% and board approved target of 30%.
Asset quality, although still satisfactory, came under pressure in F14, with the group’s gross non-performing loans (“NPL”) ratio increasing to 5.3% at FYE14 (FYE13: 3.8%). GCR notes that CBA Tanzania contributed the greatest amount of NPLs to the group, due to suboptimal credit risk management practices. In Kenya, the increase in NPLs was mainly attributable to systemic lag effects of high interest rates in F12/F13 and subdued economic activities in F14. With respect to CBA Tanzania, GCR positively notes the internal control measures which were implemented, following the surge in NPLs, and the group has since registered recoveries on some of its arrears.
Management recognised the need to bolster the group’s risk management framework, policies and practices, given its continual expansion. In this regard, the group engaged Ernst & Young to provide consulting services on the enhancement and alignment of its enterprise-wide group risk management framework with international best practices.
Although operating income increased by 20.5% (due to 46.3% growth in loans and improved non-funded income levels), the group experienced a dip in earnings in F14, owing to a 3.5x increase in provisioning costs and an uptick in operating expenses. A degree of margin compression, a capital injection and the moderation in earnings, resulted in a decline in the group’s profitability as measured by return on average assets and equity to 2% and 20% respectively in F14 (F13: 2.9% and 26.5%). However, the group’s profitability metrics are still considered sound and 1Q F15 performance points to expected higher earnings at full year.
CBA’s accorded national scale credit ratings reflect a critical assessment of the group’s market position, prospects, performance, and risks, on an absolute basis and relative to those of other leading rated players in the Kenyan and East African regional banking markets. In particular, the requirement of national scale credit ratings to express risk in relative rank order (providing an ordinal measure of credit risk which is not predictive of a specific frequency of default or loss), within the context of Kenya’s highly fragmented banking sector, and significant potential for medium-term sector consolidation, informed our view. Consequently, the realignment of the group’s ratings to reflect its position within the industry peer universe, juxtaposed with relative enhancements over a number of years at selected peers, were the primary basis for GCR’s decision. GCR determines the market position of the group based on its market share and core competences; advantages and vulnerabilities arising from its market position are examined, with emphasis on diversification, strategy, management and systems. The ratings realignment is not a reflection of substantive changes to CBA’s absolute credit strength.
An upward movement in the ratings will be contingent upon the group’s ability to significantly enhance its relative market position, while maintaining its profitability, asset quality and capital structure at levels commensurate with a higher rating. An inability to arrest the decline in asset quality, a significant increase in leverage and/or a further decline in profitability could negatively impact the group’s ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Jun/2007)|
|Long term: AA-(KE); Short term: A1+(KE)|
|Last rating (Jun/2014)|
|Long term: AA-(KE); Short term: A1+(KE)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Kenyan Bank Statistical Bulletin (December 2014)
CBA rating reports (2007-14)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Commercial Bank of Africa Limited participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Commercial Bank of Africa Limited with no contestation of the rating/s.
Information received from Commercial Bank of Africa Limited and other reliable third parties to accord the credit rating(s) included;
- Audited financial results as at 31 December 2014
- Unaudited interim results at 31 March 2015
- 5 years of comparative numbers
- Budgeted financial statements for 2015
- Latest internal and/or external report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Asset quality refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Economies of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Long term||Not current; ordinarily more than one year.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Return on Assets||A ratio of the attributable profits for the last 12 months to total assets (fixed and current) for the same period, expressed as a percentage. It measures how effectively a company generates earnings from its assets.|
|Return on Equity||ROE is the ratio of a company’s profit to its shareholders’ equity, expressed as a percentage. It is the most widely used measure of how well management uses shareholders’ funds. Its main advantage is that it is a benchmark that allows investors to compare the profitability of companies in different industries.|
|Rights Issue||One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|