Johannesburg, 30 June 2017 — Global Credit Ratings (“GCR”) has affirmed Commercial Bank of Africa Limited’s long-term and short-term national scale ratings of A+(KE) and A1(KE) respectively; with the outlook accorded as Stable. The ratings are valid until June 2018.
SUMMARY RATINGS RATIONALE
The ratings of Commercial Bank of Africa Limited (“CBA” or “the group”) reflect its satisfactory capitalisation, sound liquidity, and positive earnings trajectory despite weaker asset quality in a challenging operating environment. The ratings are further supported by CBA’s expanding regional presence with operations in Kenya, Tanzania, Uganda, and Rwanda. CBA Kenya forms the bulk of the group’s business, contributing approximately 93% of assets at FY16 (FY15: 92%).
Regulatory capital growth of 11.4% to KES25.8bn (supported by retained earnings) in FY16 combined with a risk-weighted assets decrease of 0.5% resulted in an increase of the total capital adequacy ratio to 18.4% at FY16 (FY15: 12.2%), remaining above the prevailing regulatory minimum of 14.5% at FY16. CBA’s capitalisation provides an adequate buffer against unexpected losses in the short to medium term. However, IFRS 9 (set to be implemented in 2018) may lead to higher provisioning and earlier recognition of credit losses.
Asset quality came under more pressure in FY16 on the back of slowing economic activity, and unfavourable business conditions. The group’s gross non-performing loans (“NPLs”) increased by 41.7% to KES9.4bn at FY16 (FY15: 22.1%), which was mainly attributed to reclassification of stressed loans which went into default status during the review period and a single large client which contributed 28% to NPLs. Consequently, the gross NPL ratio increased to 8% at FY16, up from 5.6% at FY15 but was still below the market average of 9.1%. Past due but not impaired loans decreased by 37.2% in FY16 after a significant growth of 106.4% in FY15, mitigating potentially higher NPLs in the short-medium term (subject to IFRS 9 implementation).
The group’s lending activities are primarily funded from customer (88.3%) and interbank (7.7%) deposits. In a bid to diversify funding and expand tenor, CBA partnered with Agence Francaise de Development in 2016 to finance green energy projects for customers via a EUR10m facility. Furthermore, in January 2017, CBA received approval for a USD90m funding line from the African Development Bank comprising a USD50m line of credit and a USD40m trade finance line of credit aimed at supporting Small and Medium Sized Enterprises and local corporates in infrastructure, trade and other transformative sectors. Like many lending institutions, CBA is subject to short-term asset-liability mismatches. To manage liquidity risk, the group maintains its liquidity ratio above both the regulatory and board approved minima. The ratio of liquid assets to short-term funding registered 49.6% at FY16, up from 45.4% at FY15.
Net profit before tax grew by 57.6% to a five year high of KES7.6bn in FY16, supported by growth in net and non-interest income, despite increases in impairment charges and operating expenditure. The group’s ROaA and ROaE increased to 3.1% and 28% in FY16 (FY15: 1.8% and 17.9%) respectively. However, GCR expects Kenyan banks’ annuity income from loans to contract in FY17 in an environment of reduced pricing flexibility. This follows publication by the Central Bank of Kenya of the Banking (Amendment) Act 2016, which established a ceiling on commercial banks’ lending rates and a floor on deposit rates effective from 14 September 2016. The full impact of interest rate caps/floors will become clearer in FY17.
An upward movement will be contingent upon the group’s ability to develop its market position, while maintaining its profitability, asset quality and capital structure at levels commensurate with a higher rating. An inability to arrest the decline in asset quality and/or further pressure on capital adequacy could negatively impact the group’s ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2007)||Last rating (June 2016)|
|Long-term: AA-(KE); Short-term: A1+(KE)||Long-term: A+(KE); Short-term: A1(KE)|
|Outlook: Stable||Outlook: Stable|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Kenya Bank Statistical Bulletin (December 2016)
CBA rating reports (2007-16)
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.
Commercial Bank of Africa 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 Commercial Bank of Africa Limited with no contestation of the ratings.
Information received from Commercial Bank of Africa 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 interim results at 31 March 2017;
• Budgeted financial statements for 2017;
• Latest internal and/or external report to management;
• A breakdown of facilities available and related counterparties; and
• Corporate governance and enterprise risk framework.
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.
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.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|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.|
|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.|
|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||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.|
|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.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
For a glossary of terms please click here
GCR affirms Commercial Bank of Africa Limited’s rating of A+(KE); Outlook Stable.