Johannesburg, 31 October 2017 — Global Credit Ratings (“GCR”) has affirmed African Banking Corporation Limited’s long-term and short-term national scale ratings of BBB(KE) and A3(KE) respectively. The ratings have been placed on ‘Rating Watch’ and are valid until April 2018.
SUMMARY RATINGS RATIONALE
The Rating Watch accorded to African Banking Corporation Limited (“ABC” or “the bank”) reflects the possibility of a rating change either positive or negative in the short term. The Rating Watch provides GCR with an opportunity to review the bank’s credit strength over the next six months, with the expectation of growth capital being injected by new shareholders, as well as ongoing efforts to reduce non-performing loans (“NPLs”) which could reduce capital at risk and ease earnings pressure, given the bank’s weak asset quality, a shrinking capital buffer, and diminishing earnings growth in light of the challenging operating environment.
The bank’s regulatory capital decreased 1.7% to KES2.9bn at FY16 (FY15: 2.3% increase) albeit core capital grew, attributable to the armotising Tier 2 qualifying corporate bond and lower statutory loan loss reserves. Meanwhile, risk weighted assets grew by 1.2% (FY15: 7.1%). This resulted in a decline of the bank’s capital adequacy ratio to 16.0% at FY16 (FY15: 16.5%), although remaining above the prevailing regulatory minimum of 14.5% at end-2016. As part of its capitalisation initiatives, the bank underwent a due diligence by private equity investors who are set to inject capital of KES2bn by end-2017. The deal is awaiting approval by the Central Bank of Kenya and is expected to strengthen the bank’s capital buffer and support its future growth initiatives.
Loan growth was constrained in FY16, as banks reduced their lending appetite following the introduction of interest rate caps in September 2016. Accordingly, ABC curbed lending, instead focusing on investing in bank placements, resulting in the loan book contracting 3.6% in FY16 (FY15: 11.3% increase). However, the loan book remains risky with a significant migration of performing loans to the special mention loans (149.6%) and non-performing loans (6.0%) buckets at FY16. Consequently, the bank’s gross NPL ratio rose to 15.4% at FY16 (FY15: 14.0%). Specific provision coverage of NPLs remained low at 15.2% at FY16 (FY15: 11.7%). Furthermore, the proportion of capital at risk increased, illustrated by the net NPLs/core capital ratio which remained high at 65.9% at FY16 (FY15: 63.6%). Management advised that loans are backed by adequate collateral, recoverable through judicial process as well as disposal through consent of the customer, and expects NPLs to reduce as a result. In addition, GCR notes the capital raising initiatives to strengthen the capital cushion.
Pre-tax earnings moderated 37.3% to KES244m in FY16, driven by contraction of the loan portfolio which negatively impacted net interest income. Overall, the bank’s ROaE and ROaA lowered to 5.7% and 0.7% in FY16 (FY16: 10.6% and 1.3%) respectively.
ABC’s statutory liquidity ratio increased to 27.1% (1H FY17: 34.7%), comfortably meeting the regulatory minimum requirement of 20%.
There is currently limited upside rating potential given the bank’s weaker financial profile within the context of an uncertain operating environment. The success of the capital raising exercise and reduction in NPLs through recovery efforts would be positively considered and is expected to strengthen the bank’s financial profile and ease solvency and asset quality concerns. ABC’s ratings could be downgraded if the group fails to raise additional capital by 30 April 2017, and/or its financial profile weakens further.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2010)||Last rating (October 2016)|
|Long-term: BBB(KE); Short-term: A3(KE)||Long-term: BBB(KE); Short-term: A3(KE)|
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Jennifer Mwerenga|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Kenya Bank Statistical Bulletin (June 2017)
African Banking Corporation Limited rating reports (2010-16)
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.
African Banking Corporation 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 ratings have been disclosed to African Banking Corporation Limited with no contestation of the ratings.
Information received from African Bank Corporation Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results as at 31 December 2016 (and four years comparative numbers);
• Unaudited management accounts at 30 June 2017;
• Budgeted financial statements for 2017;
• Latest internal and/or external audit report to management;
• A breakdown of facilities available and related counterparties;
• Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
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.
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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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 glossary of terms please click here
GCR affirms African Banking Corporation Limited’s rating of BBB(KE); Rating Watch.