Johannesburg, 28 June 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to Commercial Bank of Africa Limited of A+(KE) and A1(KE) in the long-term and short-term respectively; with the outlook accorded as Stable. The rating(s) are valid until June 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Commercial Bank of Africa Limited (“CBA” and/or “the group”) based on the following key criteria:
The ratings of CBA reflect its well-established regional franchise (supported by a long operating history), strong capitalisation, good profitability, sound liquidity and comprehensive provisioning policies in the face of asset quality pressure.
CBA has regional presence, with cross border banking subsidiaries in Uganda and Tanzania, collectively accounting for approximately 7.9% of group assets at FYE15 (FYE14: 11.1%). The group has sustained healthy capital ratios, reporting core and total capital adequacy ratios of 12.2% and 17.9% respectively at FYE15 (FYE14: 11.4% and 17.9%). This has been supported by high profit retention, issuance of subordinated debt (in F14) and fresh equity infusions (with the group injecting KES2.5bn in F15 through a rights issue).
Asset quality came under additional pressure during F15 and 1Q F16 on the back of robust loan growth, and on account of slowing economic activity, exacerbated by rising interest rates and an unfavourable business environment. To this end, the group recorded a KES5.4bn increase in non-performing loans (“NPLs”) between F14 and 1Q F16, translating into a higher gross NPL ratio of 5.6% and 9.2% at FYE15 and 1Q F16 respectively. Management indicated that the increase in NPLs in 1Q F16 was mainly due to one large client. A degree of comfort is derived from the group’s conservative provisioning policy, highlighted by its high specific provisioning coverage of 55.9% at 1Q F16 (FYE15: 73.3%; FYE14: 66.6%).
Pre-tax earnings grew 6.4% to KES4.9bn in F15, after declining by 4.4% in the prior year. The improvement was driven by a substantial increase in net interest income (benefiting from improved margins), alongside reduced growth in impairment charges and operating costs, offsetting the decline in non-funded income (mainly due to reduced foreign exchange income). ROaE and ROaA continued to trend downwards in F15 (as balance sheet and equity growth continued to outpace earnings growth), declining to 17.9% and 1.8% respectively in F15 (from 26.5% and 2.9% in F12). However, the group’s profitability metrics are still considered strong and 1Q F16 performance points to expected higher earnings for the full year.
Although the presence of liquidity risk is illustrated by the asset and liability mismatch and consequent negative short-term liquidity gaps (a structural industry feature), the group maintains a conservative liquidity management approach. As such, CBA has constantly retained its liquidity ratio well in excess of the prudential liquidity minimum of 20% and above the board approved target of 30%.
GCR will monitor developments in the operating environment and the group’s performance, with particular focus on its credit profile.
Upward movement in the group’s ratings will be contingent upon its 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 a material decline in capital adequacy could negatively impact the group’s ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2007)|
|Long-term: AA-(KE); Short-term: A1+(KE)|
|Last rating (June 2015)|
|Long-term: A+(KE); Short-term: A1(KE)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other updated March Financial Institutions, updated March 2016
Kenya Bank Statistical Bulletin 2015 (December 2015)
Kenya Operating Overview (May 2016)
CBA rating reports (2007-15)
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 2015 (and four years comparative numbers)
- Unaudited interim results at 31 March 2016
- Budgeted financial statements for 2016
- Latest internal and/or external report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
The ratings above were solicited by, or on behalf of Commercial Bank of Africa 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 SECTOR 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.|
|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.|
|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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|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.|
|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.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|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.|
|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.|
|Rights Issue||One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|Subordinated Debt||Debt that in the event of a default is repaid only after senior obligations have been repaid. It is higher risk than senior debt.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Commercial Bank of Africa Limited’s rating of A+(KE) ; Outlook Stable.