Announcements

GCR affirms Bank of Kigali Limited’s rating of AA-(RW); Outlook Stable.

Johannesburg, 29 Sep 2014 – 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 09/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Bank of Kigali Limited based on the following key criteria:

The accorded ratings reflect Bank of Kigali Limited’s (“BK” or “the Bank”) established domestic franchise, funding flexibility, sound profitability metrics, and risk appropriate capitalisation. The market as a whole, however, is vulnerable to further shocks mainly related to delays in disbursement or reduction in aid flows, delays in Government financed projects, adverse weather changes impacting on food security, and a weak global market. BK’s majority government owned stake, together with its developmental role in broadening access to banking products in Rwanda, translates into a high probability of support, if needed, from the Rwandan authorities. Furthermore, BK’s size and market presence (largest domestic bank with a deposit share of 32.4%) poses significant systemic risk should the institution fail.

BK reported a total risk weighted capital adequacy ratio (calculated in line with Basel I) of 23.7% at FYE13 (FYE12: 23.2%), which was well above the prudential minimum of 15%. Asset quality came under pressure during F13, largely reflecting the impact of delayed donor funding, the non-performance of certain Government related contracts and lagged effects of rapid credit growth. Arrears grew by 15.9% to RwF14.7bn as at FYE13, partly masked by loan writes-offs of RwF6.7bn (FYE12: RwF1.5bn). Consequently, gross non-performing loans (“NPLs”) were 6.9% of gross loans (FYE12: 6.5%). Although not stipulated in the banking regulations, the National Bank of Rwanda (“NBR”) has announced a benchmark of 5% for gross NPLs to gross loans. Management has since taken steps to improve asset quality including the setup of a dedicated Collections and Recoveries Unit. BK’s gross NPL ratio was equal to the market average of 6.9% at FYE13. Impairment coverage increased to 87.4% as at FYE13 from 70.3% at FYE12, and net NPLs remained small relative to capital (6.7% at FYE13).

Despite a rise in loan impairment charges and muted loan growth, pre-tax profit grew by 29.6% (F12: 35.8%) to RwF18.8bn in F13, supported by better collection of income and growth in transactional and foreign exchange trading income. Overall, the ROaA and ROaE increased to 4.0% and 22.2% (well above the industry averages of 1.5% and 7.4%), respectively.

A feature common to all industry players is the asset/liability mismatch. A phenomenon that is repeated across the continent is the poor savings culture. This has resulted in short dated liabilities funding comparatively longer dated assets. BK displayed a cumulative liquidity gap equivalent to 0.6x capital in the critical “less than 30-days” maturity bucket (within the acceptable norms of 0.5-1x capital). To mitigate liquidity risk, the Bank maintained a relatively liquid balance sheet with a liquidity ratio of 64.5% at FYE13 (FYE12: 44.8%), and a liquidity ratio well above the prudential minimum of 20% throughout F13 and 1H F14.

Looking ahead, an extended track record of reasonable performance, solid protection factors and sustained strong capital ratios will be considered positively. Conversely, a further strain on asset quality due to portfolio seasoning, imprudent loan growth and adverse changes in key economic and market variables could see the ratings come under pressure.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Oct/2010)
Long term: A+(RW); Short term: A1(RW)
Outlook: Stable

Last rating (Sep/2013)
Long term: AA-(RW); Short term: A1+(RW)
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)
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, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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.

The information received from Bank of Kigali 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 June 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.

Balance Sheet

Basic financial statements, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity’s assets, liabilities and owners’ equity. Also known as a statement of financial position.

Basel

Basel Committee on Banking Supervision housed at the Bank for International Settlements.

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.

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.

Franchise

Business or banking franchise; a bank’s business.

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.

Liquidity Gap

Discrepancy between incoming cash flows from the cover pool and interest or principal payments due on the privileged liabilities.

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.

NPL Ratio

The ratio of non-performing loans and advances to total gross loans and advanced expressed as a percentage.

Sovereign Risk

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

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.

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