Johannesburg, 25 May 2016 — 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 ratings are valid until May 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Diamond Trust Bank Kenya Limited (“DTB” and/or “the group”) based on the following key criteria:
The ratings of DTB reflect its strong and growing franchise in the small and medium enterprises (“SMEs”) space, a sustained robust financial profile underpinned by a significant capital cushion, a positive earnings trajectory, as well as sound asset quality relative to peers, in spite of higher impairments in F15. DTB has a growing regional franchise with cross border banking subsidiaries in Uganda, Tanzania and Burundi, collectively accounting for 29.7% of the group’s assets at FYE15 (FYE14: 33%).
Capitalisation has been supported by profit retention, equity injections and the issuance of subordinated loans. Notwithstanding the increase in risk weighted assets which outpaced capital growth in F15, DTB’s capital adequacy ratios remained well above the regulatory minima. To this end, the group registered total and Tier 1 capital adequacy ratios of 18.9% and 15.5% respectively at FYE15 (against minimum regulatory requirements of 14.5% and 10.5% correspondingly).
Asset quality came under pressure in F15 on the back of robust loan growth, and on account of slowing economic activity, exacerbated by rising interest rates and an unfavourable business environment. DTB’s gross non-performing loan (“NPL”) ratio increased to 2.3% (FYE14: 1.1%), while specific provisioning coverage dropped to 66.0% at FYE15 (FYE14: 90.5%). Nonetheless, the group’s loan portfolio remains healthy, exhibiting one of the lowest gross NPL ratios and highest coverage ratios in the market.
Earnings increased substantially following the growth in lending activity (which offset the contraction in net interest margin), and complemented by the 24.2% increase in non-interest income and further cost containment, which saw the cost to income ratio decline from 43.4% to 41.1% in F15. GCR notes that the group’s growth and increased sector maturity has been accompanied by declining profitability measures due to increased competition. Nonetheless, with a ROaE and ROaA of 20.9% and 2.7% respectively in F15, DTB’s profitability metrics are still considered strong.
In spite of the asset and liability mismatch and consequent negative short-term liquidity gaps (a structural industry feature), the group maintains adequate liquidity buffers. 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.
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 ratings could be negatively impacted if its aggressive balance sheet growth increases credit and liquidity risks, or if its asset quality, capital base and/or earnings power are materially diminished.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2011)|
|Long-term: A+(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
DTB rating reports (2011-15)
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.
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 ratings have been disclosed to Diamond Trust Bank Kenya Limited with no contestation of the ratings.
Information received from Diamond Trust Bank Kenya Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2015
- 5 years of 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, 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 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.|
|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||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.|
|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.|
|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.|
|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.|
|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.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a detailed glossary of terms utilised in this announcement please click here
GCR affirms Diamond Trust Bank Kenya Limited’s rating of A+(KE); Outlook Stable.