Johannesburg, 28 Sep 2015 – Global Credit Ratings has today affirmed the national scale ratings assigned to Bank of Kigali Limited of AA-(RW) and A1+(RW) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until September 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Bank of Kigali Limited’s (“BK” or “the Bank”) based on the following key criteria:
The accorded ratings reflect BK’s long history and dominant position, with an asset market share of 33.7% at FYE14 (more than three times its nearest competitor). The risk appropriate capitalisation, adequate loan loss reserves, sound liquidity metrics and extended track record of sound performance, were also factored into the ratings. These are, however, partially offset by the domestic market’s vulnerability to further shocks (mainly related to delays/reduction in aid flows, delays in Government of Rwanda (“GoR” or “Government”) financed projects, adverse weather changes, regional instability and a weak global market), and their potential impact on asset quality.
BK’s majority Government ownership of 54.6% (where GoR directly owns 29.5% and indirectly owns 25.1% through the Rwanda Social Security Board (“RSSB”)), together with its role in broadening access to banking channels and products in Rwanda, translates into a high probability of support from the Rwandan authorities if required. Furthermore, BK’s size in terms of balance sheet and client base poses significant systemic risk should the institution fail.
The Bank is adequately capitalised with a risk weighted capital adequacy ratio (“CAR”) of 26.3% (FYE13: 23.7%) at FYE14 (calculated in line with Basel I), which was well above the regulatory minimum of 15% (industry average 21.4%).
Asset quality indicators improved during F14 on the back of loan write-offs totalling FRw 8.9bn or 3.6% (FYE13: 3.1%) of gross loans. This, coupled with 16.4% gross loan growth, saw a decline in the gross non-performing loan (“NPL”) ratio to 6.6% at FYE14 (FYE13: 6.9%). The industry average gross NPL ratio stood at 6% at FYE14. While not stipulated in the banking regulations, the National Bank of Rwanda (“NBR” or “the Central Bank”) has announced a benchmark of 5% for gross NPLs to gross loans. Management has since taken steps to improve asset quality, including the implementation of a loan work-out unit and the introduction of a centralised retail loans underwriting process. Arrears coverage by specific provisions increased to 71.4% at FYE14 (FYE13: 67.8%), pre-collateral. Unreserved impaired loans (net NPLs) remain low relative to capital at 5.2% at FYE14 (FYE13: 6.7%).
The Bank posted a 21.3% (F13: 29.6%) rise in pre-tax profit amounting to FRw 22.8bn for F14, driven by growth in net interest income, lower impairment charges and cost containment. Overall, the ROaE increased slightly to 22.9% (F13: 22.2%), while the ROaA remained flat at 4%.
BK displays significant contractual asset/liability mismatches, a feature common to all industry players (and emerging markets in general), due to reliance on short-dated funding to fund longer dated loans and advances. In the case of BK, 13.2% of loans and advances mature within one month, compared to 77.2% of deposits at FYE14. In terms of behavioural maturity, however, deposits tend to be stable despite their short maturities; around 70% have historically been sticky. To mitigate the maturity mismatches, the Bank has also raised long-term lines of credit. Liquidity risk is further ameliorated through maintaining a highly liquid balance sheet. The liquidity ratio was maintained well above the prudential minimum of 20% throughout FYE14 and 1H F15.
A downward trend in NPLs, continuing sound financial performance, maintaining market position and support, and a further enhancement of the regulatory environment in line with best practice, could lead to upward ratings migration. Conversely, sustained pressure on profitability stemming from a sharp rise in loan loss provisions and a higher susceptibility to economic changes and competitive pressures, or a marked decline in liquidity or capitalisation, could lead to negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (October 2010)
Long term: A+(RW); Short term: A1(RW)
Last rating (September 2014)
Long term: AA-(RW); Short term: A1+(RW)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
BK rating reports (2010-14)
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.
Bank of Kigali 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 Bank of Kigali Limited with no contestation of the rating.
- Audited financial results of the Bank as at 31 December 2014 (plus four years of comparative figures)
- Unaudited interim results of the Bank as at 30 June 2015
- 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
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Bank of Kigali 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
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|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.|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|NPL Ratio||The ratio of non-performing loans and advances to total gross loans and advances, expressed as a percentage.|
|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.|
|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.|
|Systemic Risk||Risk associated with the general health or structure of the financial system which would have serious adverse effects on economic conditions or financial stability.|
|Write-off||The total reduction in the value of an asset.|
For a detailed glossary of terms utilised in this announcement please click here