Johannesburg, 17 November 2016 – Global Credit Ratings has today assigned national scale ratings to Kenya Police Sacco Society Limited of BB+(KE) and B(KE) in the long and short term respectively; with the outlook accorded as Stable. The ratings are valid until October 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Kenya Police Sacco Society Limited (“Police Sacco”, “the society”) based on the following key criteria:
The ratings of Police Sacco reflect its growing local franchise, built on member based lending targeting employees of the National Police Service (“NPS”), which was later expanded (in 2013) to include the wider business community, civil service and other salaried employees. Police Sacco is the fourth largest deposit taking savings and credit cooperative society (“DT-Sacco”) in Kenya, with a market share of 5.1% (in terms of assets) out of the 176 registered DT-Saccos at end-2015. The society has a qualified and experienced senior management team with a clear strategy. The board is structured in line with existing regulations.
Although the society is not constrained by the same capital reserving rules applied to banks, the overall capital base appears adequate for the level of risk assumed. Core capital grew by 11.4% to KES3.3bn at FYE15, supported by growth in membership and retained income. The society reported a core capital to total assets ratio of 19.0% at FYE15, against a regulatory minimum of 10%. The core capital to total assets ratio increased slightly to 19.2% at 3Q F16 based on monthly returns submitted to the Sacco Societies Regulatory Authority (“SASRA”, “the regulatory authority”). From a gearing perspective, external borrowings at 4.5% of total assets at FYE15 (FYE14: 7.7%) were well within the statutory cap of 25%.
Gross non-performing loans (“NPL”) (30+ days overdue) grew by 25.9% at FYE15 (FYE14: 48.0% decrease) partly due to over-borrowed members and an increase in statutory deductions on incomes. Gross NPLs increased by a further 79.1% to KES357.3m at 3Q F16 (based on returns submitted to SASRA). Notwithstanding this, the society‘s loan book quality remains sound, with gross NPLs amounting to 1.0% of gross loans at 3Q F16 (FYE15: 0.6%). Delinquency levels benefit from the society’s reliance on payroll deduction for collection of 99% of total loans. The society is intensifying its loan monitoring and collection efforts and has adopted stricter affordability assessments to reduce NPL formation. NPLs were more than fully provided for at 3 QF16 and FYE15, resulting in a negative net NPL (net of provisions) to core capital ratio.
Pre-tax profit grew by 27.0% to KES464.2m in F15 (F14: 11.2% decrease), supported by loan growth, increase in non-interest income, and significantly lower operating expenses. The increase in income was able to absorb a 2.7x increase in credit costs, following adjustments to the general loan loss provision policy in line with prudential guidelines. The cost ratio decreased to 46.3% in F15 (F14: 54.2%; industry average 66.8%). Overall, the society’s ROaE decreased to 13.8% in F15 (F14: 15.3%), while the ROaA remained flat at 2.6%.
The liquidity ratio stood at 15.1% at 3Q F16 (FYE15: 36.1%) against a statutory minimum of minimum of 15%. The decline in the liquidity ratio was mainly due to delayed receipt of the payroll deduction cheque from the main employer ie, the NPS. According to management, payments from the NPS are generally timely and the liquidity risk arising from any delays is largely mitigated by available credit lines and member salaries that come through the society. Furthermore, the high proportion of non-withdrawable deposits to total deposits (92% at 3Q F15) helps mitigate liquidity risk.
The maintenance of adequate capitalisation and liquidity buffers, a positive earnings trend, sound asset quality, enhanced risk management oversight, improved market position and a further enhancement of the regulatory environment in line with best practice, will be positively considered. Conversely, a significant deterioration in asset quality, diminished earnings, liquidity and capital metrics and/or breach of key prudential benchmarks, could lead to negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating: First time/New rating|
|Outlook: First time/New rating|
|Primary Analyst||Committee Chairperson|
|Jennifer Mwerenga||Omega Collocott|
|Senior 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 2016
Criteria for Rating Finance and Leasing Companies, updated March 2016
Kenya Operating Environment Overview (May 2016)
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.
Kenya Police Sacco Society Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Kenya Police Sacco Society Limited with no contestation of the rating.
- Audited financial results of the society as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the society as at 30 September 2016
- Budgeted financial statements for 2016
- 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
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Kenya Police Sacco Society 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||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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 (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Corporate Governance||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.|
|Cost Ratio||The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|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.|
|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.|
|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.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|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).|
|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.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR accords an initial rating of BB+(KE) to Kenya Police Sacco Society Limited; Outlook Stable.