Johannesburg, 30 Jul 2015 – Global Credit Ratings has today assigned national scale ratings to Chase Bank Kenya 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 May 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Chase Bank Kenya Limited’s (“Chase” and/or “the bank”) based on the following key criteria:
The accorded ratings reflect Chase’s growing local footprint, built on a successful relationship-based banking model focusing on the small and medium enterprise and corporate segments, although the bank is increasingly growing its retail penetration. The profitable bottom line, increasing capitalisation and appropriate risk management systems, were also factored into the ratings.
Capitalisation strengthened in F14, supported by a rights issue which raised KES1.3bn (c.USD15m) and retained earnings of KES2.3bn. Consequently, total capital and reserves grew by 47.8% or KES3.6bn to KES11.1bn at FYE14. The Central Bank of Kenya issued revised prudential guidelines in January 2014 that require banks to maintain an additional capital conservation buffer of 2.5% effective January 2015. This effectively increased banks’ minimum regulatory capital requirement to 14.5% from 12%. Chase had a total risk weighted capital adequacy ratio of 21.1% at 1H F15 (FYE14: 15.3%), which was well above the revised regulatory benchmark of 14.5%.
In June 2015, Chase successfully concluded a KES3bn bond issue (the bank’s first public offer). The KES3bn bond issue, with a green shoe option of KES2bn, was the first tranche (the balance will be issued within the next three years) of a KES10bn (c.USD112m) 7-year Multicurrency Term Note Programme. The debt issue had a 161% subscription rate, raising KES4.8bn. Consequently, Chase exercised the green shoe option to take up the extra KES1.8bn. The bank also raised a further KES1.6bn (c.USD18m) via a rights issue concluded in June 2015 plus KES0.6bn (c.USD7m) from an increase in the employee share option programme. A private placement anticipated to conclude by 30 October 2015 is expected to raise KES2.3bn (c.USD26m). The total proceeds from the capital raising exercises will be used to further strengthen the bank’s capital base, support growth and onward lending activities, and fund branch expansion, investments in IT and other product development initiatives
Gross non-performing loans (“NPLs”) amounted to 5.7% of gross loans at FYE14, up from 4.9% at FYE13 (industry average 5.6%). The decline in asset quality was attributable to delayed government payments (as the government transitioned to a devolved government), which negatively impacted borrowers with government contracts, and a loan reclassification and stricter provision policy in F14. The bank’s provisions covered gross NPLs by 48.3% at FYE14 (FYE13: 47.5%), pre-collateral. NPLs are fully covered after taking into account the fair value of collateral held, although the realisation of collateral in Kenya can be a lengthy process. At FYE14, net NPLs were 3.8% and 10.7% of net advances and total capital respectively.
Pre-tax profit grew by 46.7% to KES3.3bn in F14, despite growth in impairment charges. The earnings performance was on the back of strong growth in non-interest income (foreign exchange dealings, fees and commissions) and an expanded loan book. The ROaE increased marginally to 25%, while the ROaA remained flat at 2.5%. Liquidity risk is partly ameliorated through maintaining a liquid balance sheet.
GCR views the capital raising exercise as credit-positive. The appropriate deployment of capital/funding, a positive earnings trend (while maintaining credit protection factors), a reduction in funding costs, and further strengthening of the bank’s competitive position in the domestic market, could lead to an upward migration in the ratings. However, downward pressure on the bank’s earnings, increasing liquidity risk, asset quality problems associated with rapid asset growth, and the uncertain macro-economic outlook, could see the ratings come under pressure.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (not applicable)
Long-term: first time/new rating
Short-term: first time/new rating
Rating outlook: first time/new rating
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Kenya Bank Statistical Bulletin (June 2015)
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.
Chase Bank Kenya Limited participated in the rating process via teleconferences 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 Chase Bank Kenya Limited with no contestation of the rating.
- Audited financial results of the bank as at 31 December 2014
- Unaudited interim results of the bank as at 30 June 2015
- Four years of comparative audited financial results/statements
- Budgeted financial statements for 2015
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Capital management policy
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Chase Bank Kenya Limited, 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 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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Private Placement||The sale of securities to a small number of institutional investors such as large banks, insurance companies and pension funds. Such issuances do not require a formal prospectus and are often not listed on an exchange.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|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.|
|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.|
|Tranche||Used to mean an allocation or instalment of a larger loan facility. Tranches of the same debt programme may differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.|