Announcements

GCR affirms African Banking Corporation Limited’s rating of BBB(KE); Outlook Stable.

Johannesburg, 29 Oct 2014 – Global Credit Ratings has today affirmed the national scale long term rating assigned to African Banking Corporation Limited of BBB(KE) and upgraded the national scale short term rating to A2(KE); with the outlook accorded as Stable. The rating(s) are valid until 10/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to African Banking Corporation Limited (“ABC” or “the bank”) based on the following key criteria:

The ratings are supported by ABC’s moderate business and financial risk profile. ABC benefits from its developing niche position, providing focused services and solutions to mid-to-large size corporate firms, leveraging off its strengths in asset/trade finance and international/local remittance solutions.

At FYE13, ABC reported a 15.1% total regulatory capital adequacy ratio (“CAR”), up from 14.6% at FYE12, due to the faster growth in capital relative to risk assets. Although the CAR was above the regulatory minimum of 12%, new capital adequacy rules announced by the Central Bank of Kenya (“CBK”) necessitated a capital raise exercise to shore up the capital buffers and support future growth. Revised prudential guidelines issued in January 2013 by the CBK, require banks to maintain an additional capital conservation buffer of 2.5%. This will effectively increase banks’ minimum regulatory CAR to 14.5% from January 2015. In addition, banks are required to allocate capital for market and operational risk with effect from January 2014. Accordingly, the bank raised KShs1bn (c.US$11.6m) Tier II capital through a 5.25 year Kenyan shilling bond issue during 1H F14. A further KShs1bn (Tier I capital) is expected to be raised by end-2014 through a capital injection from institutional investors. Quarterly returns submitted to the CBK indicate that the bank had a capital adequacy ratio of 16.9% as at 3Q F14.

Asset quality weakened during F13, largely due to the lag effects of the high interest rates experienced in 2011/12 and the impact of slow government payments to creditors (during the transition period to a devolved system of government post elections in March 2014). The situation has since improved and government is reducing the back log. Arrears more than doubled to KShs500m at FYE13. The gross non-performing loan (“NPL”) ratio increased to 4.3% from 2.0% at FYE12, although remaining below the industry average of 5.2%. Provisions covered 36.6% of NPLs, down from 92.4% at FYE12, pre-collateral. The sharp decline in provision levels was due to the bank calling for additional collateral from affected clients. Provisions are raised after taking into account the fair value of collateral held. Consequently, net NPLs as a percentage of capital increased to 11.4% at FYE13 (FYE12: 0.7%), pre-collateral. Although credit mitigation is supported by holding collateral, cumbersome legal processes mean that the realisation of collateral may be problematic, and a lengthy process.

Net profit before tax grew by 12.5% to KShs592m in F13, supported by loan growth and higher margins, offsetting the rise in loan impairment charges and expansion related costs. In F13, ROA and ROE were 2.5% (F12: 2.6%) and 22.1% (F12: 21.9%), compared to the industry averages of 4.7% and 29.2% respectively. The bank’s liquidity (liquid assets/short term funding) ratio decreased to 45.0% at FYE13 (FYE12: 50.3%), due to a higher absorption of cash to support lending, but remained well above the prudential minimum of 20% throughout F13 and 1H F14.

The upgrade of the bank’s short term rating is a reflection of the positive operational changes in the business, including the enhanced funding profile of the bank and the potential internal growth (given the impending capital injection from institutional investors). Appropriate deployment of capital/funding, improving profitability (while maintaining credit protection factors), the diversification of income streams and a reduction in funding costs (on the back of the retail strategy) may have a positive impact on the bank’s long-term rating going forward. The ratings will be sensitive to further deterioration in asset quality, long-term earnings and capital levels.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Sep/2010)
Long term: BBB(KE); Short term: A3(KE)
Outlook: Stable

Last rating (Oct/2013)
Long term: BBB(KE); Short term: A3(KE)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Jennifer Mwerenga
Senior Analyst
(011) 784-1771
jennifer@globalratings.net

Committee Chairperson
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014)
Kenya Bank Statistical Bulletin (June 2014)
Previous Rating Reports (up to 2013)

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.

The ratings above were solicited by, or on behalf of, African Banking Corporation Limited, and therefore, GCR has been compensated for the provision of the ratings.

African Banking Corporation 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 rating/s has been disclosed to African Banking Corporation Limited with no contestation of the rating.

The information received from African Banking Corporation Limited and other reliable third parties to accord the credit rating included the 31 December 2013 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external management reports, 2014 budgeted financial statements, 30 September 2014 management accounts, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

Asset Quality

The ability of a bank’s assets, especially its loans, to continue to perform according to its terms and generate net interest income for the bank.

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.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

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 and its results of operations for a period then ended.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Interest Rate

The amount paid by a borrower to a lender in exchange for the use of the lender’s money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures.

Liquid Assets

Assets, generally of a short term, that can be converted into cash.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Non-performing loan

When a borrower is overdue, typically 90 + days in arrears or as defined in the transaction documents.

Operational Risk

The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.

Tier I Capital

Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.

Regulatory Capital

The total of primary, secondary and tertiary capital.

Retained Earnings

The accumulation of an entity’s profits less any dividends paid out.

Reputational Risk

The risk of impairment of an entity’s image in the community or the long-term trust placed in it by its shareholders as a result of a variety of factors, such as performance, strategy execution, the ability to create shareholder value, or an activity, action or stance taken by the entity.

Tier II Capital

Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.

Sovereign Risk

The risk of default by the government of the country on its obligations.

Strategic Risk

The risk of an adverse impact on capital and earnings due to business policy decisions (made or not made), changes in the economic environment, deficient or insufficient implementation of decisions, or failure to adapt to changes in the environment.

Subordinated Debt

Refers to the status of the debt. In the event of the bankruptcy or liquidation of the debtor, subordinated debt only has a secondary claim on repayments, after other debt has been repaid.

Tertiary Capital

Tertiary capital means accrued current-year uncapitalised net profits derived from trading activities; and capital obtained by means of unsecured subordinated loans, subject to such conditions as may be prescribed.

GCR affirms African Banking Corporation Limited’s rating of BBB(KE); Outlook Stable.

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