Johannesburg, 29 September 2017 — Global Credit Ratings has affirmed Bank of Kigali Limited’s long-term and short-term national scale ratings of AA-(RW) and A1+(RW) respectively; with the outlook accorded as Stable. The ratings are valid until September 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Bank of Kigali Limited (“BK”, “the Bank”) based on the following key criteria:
The Bank’s ratings reflect its long history and leading domestic market position by assets. The Bank’s strong capitalisation, comfortable liquidity position and resilient earnings performance in a challenging economic climate are key rating factors as well.
The ratings also reflect potential support from the Rwandan authorities if required, given BK’s domestic systemic importance owing to its relatively large balance sheet size and client base. Furthermore, the Government’s controlling stake in BK (29.5% directly and 25% through the Rwanda Social Security Board) and the Bank’s role in broadening access to banking channels and products in Rwanda, increases the likelihood of support.
The Bank’s total capital adequacy ratio (“CAR”) and Tier 1 CAR declined to 19.6% and 19% at FY16 respectively (FY15: 22.5% and 22.1%), although remaining well above the regulatory minima of 15% and 10% respectively, calculated in line with Basel I principles. The continuous decline in capital adequacy ratios is attributable to an increasingly risky balance sheet, with loans and advances (largest asset class on balance sheet) increasing to 60.4% of total assets at FY16 (FY15: 55.9%, FY14: 48.4%).
Notwithstanding asset quality pressures noted in the banking sector on the back of a challenging economic climate, BK’s gross non-performing loan (“NPL”) ratio continued to improve to 5.2% at FY16 (FY15: 5.8%, FY14: 6.6%), supported by loan growth, improved recoveries, and enhanced underwriting practices. The average industry gross NPL ratio was 7.6% at end-2016 up from 6.2% at end-2015. The Bank targets a gross NPL ratio of less than 5%. Furthermore, portfolio at risk (NPLs plus past due but not impaired loans) decreased to 9.6% at FY16 (FY15: 13.7%, FY14: 21.0%), largely as a result of the vast majority of special mention loans moving to the performing loans bucket over the cycle. However, net past due loans remained high at 28% relative to core capital at FY16, albeit improving over the past three financial years. Specific provision coverage of NPLs remained stable (42.3%) at FY16.
The Bank recorded a pre-tax profit of FRw30bn in FY16, up from FRw25.7bn in FY15. This is mainly attributable to growth of 20.5% in net interest income despite a rise in funding costs, and an increase (34.1% on average) in non-funded income. Furthermore, the cost/income ratio for FY16 remained somewhat stable at a lower 47.4%, as the Bank continued to maximise returns. Obscuring growth in pre-tax profit, headline earnings grew by a modest 1.3%, largely driven by a tax increase of 30.8% of pre-tax profit (FY15: 20.4%). Consequently, ROaE and ROaA declined to 20% and 3.5% at FY16 respectively. Nonetheless, the Bank’s returns remain attractive comparing favourably to peers.
BK displays significant contractual asset/liability mismatches, a feature common to all industry players, due to its loan book being largely funded by short-dated customer deposits. That said, the negative liquidity gap for the 30 days maturity bucket increased, covering core capital 1.3x at FY16. To mitigate a liquidity risk from maturity mismatches, the Bank has increased funding sources by securing additional long-term lines of credit. Furthermore, liquidity risk is mitigated through maintaining a portfolio of highly liquid assets on balance sheet. Consequently, the Bank maintained a liquidity ratio above the statutory minimum of 20% throughout FY16.
Strong asset quality, ensuring a capital buffer to support the increasing balance sheet risk, and maintaining stronger earnings generation supported by the Bank’s leading market position, could lead to upward ratings migration. Negative rating action would likely follow a reversal in trends in asset quality metrics currently observed, shrinking of the capital buffer required to support an increasingly risky balance sheet, and weaker earnings generation.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2010)||Last rating (September 2016)|
|Long-term: A+(RW); Short-term: A1(RW)||Long-term: AA-(RW); Short-term: A1+(RW)|
|Outlook: Stable||Outlook: Stable|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Bank of Kigali 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.
Bank of Kigali Limited participated in the rating process via teleconference 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 Bank of Kigali Limited with no contestation of the ratings.
Information received from Bank of Kigali Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the Bank as at 31 December 2016 (plus four years of comparative figures);
- Unaudited interim results of the Bank as 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;
- Capital management policy; and
- 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
|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.|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|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.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|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.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|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||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.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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 glossary of terms please click here