Johannesburg, 30 Jun 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Diamond Trust Bank Kenya 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 Jun/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Diamond Trust Bank Kenya Limited (“DTB” and/or “the group”) based on the following key criteria:
DTB’s ratings reflect a strong and growing franchise in the small and medium enterprises space, a sustained robust financial profile underpinned by a significant capital cushion, a positive earnings trajectory, as well as sound asset quality.
DTB has a growing regional franchise with cross border banking subsidiaries in Uganda, Tanzania and Burundi, collectively accounting for approximately 33% of the group’s assets at FYE14 (FYE13: 33%).
DTB’s capital position improved in F14, consequent to a rights issue of KES3.6bn (the fourth since 2006), which was oversubscribed, evidencing shareholders’ continued commitment to the group. In addition, the group’s capital base was enhanced by an issue of KES2.0bn in subordinated debt in F14, as well as profit retention. The group further augmented its capital base in 1Q F15 through another subordinated loan of USD20m. Over the next six months, through its Tanzanian and Ugandan subsidiaries, the group plans to raise additional capital by way of rights issues, although this will not impact capitalisation at group level.
Stringent underwriting standards, rigorous post-disbursement monitoring and strong recovery procedures have translated into asset quality that is amongst the best in the sector. In this regard, the group registered a gross non-performing loans (“NPL”) ratio of 1.1% at FYE14 (FYE13: 1.1%), against an industry average of 5.6%. Further, DTB’s provisioning policy is more prudent than that stipulated by the Central Bank of Kenya (“CBK”), as it places limited consideration on collateral values when arriving at the provisioning figures. Consequently, the group’s specific coverage has remained above 90%.
The group delivered strong earnings, despite experiencing a degree of margin compression, due to higher funding costs driven by increased competition. Supported by loan growth, improved non-funded (mainly fee and commission) income and low provision costs, the group registered a bottom line increase of 9.1% in F14 (F13: 28.6%).
The group maintains a conservative approach to liquidity management. In this regard, DTB sustained a strong liquidity position over the review period, evidenced by a liquidity ratio which constantly stood above both the regulatory required and board approved minima of 20% and 25% respectively.
DTB’s accorded national scale credit ratings reflect a critical assessment of the group’s market position, prospects, performance, and risks, on an absolute basis and relative to those of other leading rated players in the Kenyan and East African regional banking markets. In particular, the requirement of national scale credit ratings to express risk in relative rank order (providing an ordinal measure of credit risk which is not predictive of a specific frequency of default or loss), within the context of Kenya’s highly fragmented banking sector, which has significant potential for medium-term sector consolidation, informed this view.
The group’s ratings could be positively impacted by an ability to consolidate and substantially enhance its market share while maintaining sound financial fundamentals. DTB’s rating could be negatively impacted if its aggressive balance sheet growth induces credit and liquidity risks, or its asset quality, capital base and/or earnings power are materially diminished.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Sep/2011)|
|Long term: A+(KE); Short term: A1(KE)|
|Last rating (Jun/2014)|
|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 Financial Institutions, updated March 2015
Kenya Bank Statistical Bulletin (December 2014)
DTB rating reports (2011-14)
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.
Diamond Trust Bank Kenya 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 rating/s has been disclosed to Diamond Trust Bank Kenya Limited with no contestation of the rating/s.
Information received from Diamond Trust Bank Kenya Limited and other reliable third parties to accord the credit rating(s) included;
- Audited financial results as at 31 December 2014
- Unaudited interim results at 31 March 2015
- 5 years of comparative numbers
- Budgeted financial statements for 2015
- 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, 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||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 (i.e. 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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Corporate governance broadly 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||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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Exchange||A standardised marketplace in which different assets are traded.|
|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.|
|Franchise||Business or banking franchise; a bank’s business.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|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||The national scale 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.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|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.|