Johannesburg, 28 September 2018 — Global Credit Ratings has affirmed Bank of Kigali Plc’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 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Bank of Kigali Plc (“BK”, “the bank”) based on the following key criteria:
The ratings reflect the bank’s leading market position and systemic importance domestically. Ratings are further supported by increasing profitability, adequate capitalisation, an adequate risk position, and adequate funding and liquidity.
BK is a market leader in Rwanda with a market share of 34.3% at FY17, albeit geographically undiversified. Subsequently, the National Bank of Rwanda Financial Stability Committee classified BK as a domestic systematically important bank (“DSIB”) and regularly monitors the bank for soundness. Hence, GCR is of the view that the bank will likely receive direct support from the government in a time of stress. The bank is the core operation of Bank of Kigali Group Plc (“BK group”, “the group”), contributing at least 99.9% of group assets and 98.4% of group revenue at FY17.
The group posted net profit after tax of FRw23.3bn at FY17 (FY16: FRw20.8bn), driven by higher interest income on equipment and mortgage loans, higher fee and commission income coupled with sound cost control. A softer rise in the group’s cost base resulted in a modest cost to income ratio of 45.2% at FY17 (1H18: 42.1%). Generally, revenue stability is considered to be adequate compared with peers. An increase in net interest margin (“NIM”) to 10.7% at 1H18 (FY17: 10.4%) supports GCR’s expectations that the group’s NIM will range between 10.0% and 11.0% over the next 12 months.
The group is considered to be adequately capitalised, evidenced by a core capital to risk weighted assets ratio of 21.7% at 1H18 (FY17: 18.9%). While BK is classified as a DSIB, the central bank has not yet defined the level of additional capitalisation required for this classification. Therefore, the group aims to consistently maintain a capital buffer of at least 5.0% above the regulatory capital adequacy ratio of 15.0% as a precaution. GCR expects the group’s capitalisation to increase to about 29.0% upon its anticipated secondary listing on the Nairobi Stock Exchange by the end of FY18, and to be gradually eroded to adequate levels of between 23.0% and 25.0% over the next 3 years.
BK group’s risk position is considered to be adequate relative to its peers, albeit registering an increasing non-performing loans ratio (“NPL”) of 5.8% at 1H18 (FY17: 5.6%). The deterioration in the ratio is mainly attributable to single name entities in the real estate and hotel industries currently experiencing poor financial performance. However, GCR believes that the group holds sufficient collateral to mitigate associated credit risk and considers its loan loss reserving as adequate. The group registered a pre-collateral NPL coverage ratio of 79.6% at 1H18 (FY17: 72.9%). In light of this, GCR expects the group’s credit losses to be contained within a 2.5% to 3.5% range over the rating horizon. Unfavourably, a skew towards corporates causing high concentration of the loan book is noted, and GCR does not expect a shift in this position over the rating horizon.
The group’s funding is considered to be stable, with customer deposits making up 78.8% of the group’s funding base at FY17. In GCR’s view, the funding base presents a relatively fair level of diversification and deposit concentrations are considered to be minimal, with the top twenty depositors contributing 34.7% of the customer deposits. Positively, BK group’s cost of funds equated to a modest 3.1% at 1H18 (FY17: 3.2%). Overall, GCR envisions the group’s funding structure strengthening over the rating horizon, augmented by increased equity from the anticipated recapitalisation of the group. BK group’s liquidity is viewed to be adequate, supported by a liquid asset to total wholesale funding coverage ratio of 2.1x at FY17 (FY16: 2.9x).
Successful recapitalisation and efficient deployment of the anticipated additional capital resulting in a notable increase in the group’s overall profitability while maintaining adequate capitalisation, an adequate risk position, and adequate funding and liquidity could trigger a positive rating action. A negative rating action may follow a deterioration in the group’s asset quality and/or a weakened operating environment.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2010)||Last rating (September 2017)|
|Long-term: A+(RW); Short-term: A1(RW)||Long-term: AA-(RW); Short-term: A1+(RW)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Nyasha Chikwengo|
|Credit Analyst||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Bank of Kigali Limited rating reports (2010-17)
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 process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Bank of Kigali Plc participated in the rating process via face-to-face management meetings, 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 Plc.
Information received from Bank of Kigali Plc and other reliable third parties to accord the credit ratings included:
- Audited financial results of the group as at 31 December 2017 (plus four years of comparative figures);
- Audited interim results of the group as at 30 June 2018;
- Budgeted financial statements for 2018;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties;
- Industry comparative and regulatory framework.
The ratings above were solicited by, or on behalf of, Bank of Kigali Plc, 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 detailed glossary of terms please click here
GCR affirms Bank of Kigali Plc’s rating of AA-(RW); Outlook Stable.