Johannesburg, 22 October 2020 – GCR Ratings (“GCR”) has affirmed the Kenyan long and short-term issuer ratings on Diamond Trust Bank Limited of A+(KE) and A1(KE) respectively, with outlook revised to Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Diamond Trust Bank Limited||Long Term issuer||National||A+(KE)||Negative Outlook|
|Short Term issuer||National||A1(KE)|
The ratings on Diamond Trust Limited (‘DTB’, ‘the bank’) reflect the strengths and weaknesses of the DTB Group (‘the group’). The group has a fairly strong market position, adequate capitalisation, moderate risk position, and good funding and liquidity profile. The negative outlook reflects our banking sector view of the possibility of earnings and/or asset quality metrics deteriorating beyond expectations, given the COVID-19 strain on the operating environment and the bank’s exposures to some of the vulnerable economic sectors.
DTB is an SME focused bank positioned at the lower end of the top tier institutions in Kenya’s fragmented banking sector. The bank has a fairly strong domestic franchise, reflected by its share of industry deposits and assets of 5% and 5.5% at HY20 respectively, although the consolidation of some top tier banks during 2019 lowered the bank’s market position. DTB is predominantly funded by term deposits and its cost of funds was 4.5% at HY20 (HY19:4.9%), comparing less favourably to some top tier banks. Positively, the franchise benefits from banking subsidiaries in Tanzania, Uganda, and Burundi having better market position than subsidiaries of domestic peers. Our business profile assessment also factors in a good track record of revenue stability, adequate levels of product and geographic diversification, coupled with good governance structures.
Capitalisation is positive to the ratings. The group’s GCR total capital ratio is moderate at c.19% as at FY19, balancing the highly capitalised Kenyan entity and the relatively lower capitalised subsidiaries. Our capital and earnings assessment factors in a 50-100bps moderation of the ratio to around 18% over the next 18-24 months, balancing the anticipated risk asset growth, appropriate loan loss reserving and modest earnings. The total loan loss reserve coverage of non-performing loans (‘NPLs’) was 60% at HY20, which is just above the sector average. Internal capital generation is good, although pressure on earnings will likely persist for the next 12-18 months given low interest rates and higher credit losses. Assets are expected to return a lower 1.8%-1.9% over the next 2 years, down from the 2%-2.2% range reported over the last 4 years. However, this is consistent with sector wide expectations and earnings remain positive while the cost/income ratio is currently low and improving to support the bottom line.
Risk position is a neutral ratings factor, balancing better than sector average NPLs and credit losses (especially against lower tier peers) and high foreign currency (‘FX’) lending. Credit losses were higher at 1.8% HY20, up from 0.5% Dec.2019, following management’s decision to increase loan loss reserves given the deteriorated credit conditions post COVID-19. NPLs have gradually edged higher (7% at HY20) and we expect the ratio to close at around 7.2% which is still well below the sector average. Around 40% of the bank’s loans are on some sort of payment restructuring due to the pandemic. However, about 30% of these exposures continue to pay interest with the moratorium only applying to capital. The loan book is fairly diversified by sector, but with notable concentrations to real estate (23%) and trade and commerce (25%). We think that some of these sectors (real estate in particular) are vulnerable and may potentially weigh on the bank’s NPLs over the medium term. Conversely, we do not expect credit losses to increase materially from current levels over the same period, given 1) the current loan loss reserving levels and 2) the level of collateralisation (close to 2x) which we think provides sufficient headroom to the downside risk in forced sale value scenarios. However, the bank’s FX lending (c.50% of loan book is USD) is very high vs sector averages and we view this negatively given risks from a potential dry up in USD liquidity. This risk is moderated by the fact that the borrowers generate FX earnings and the bank holds right to convert FX loans to local currency.
Funding and liquidity is a positive ratings factor, supported by a stable funding structure and good levels of liquidity. The funding structure is considered stable given the stickiness of term deposits and a diversified depositor base. The liquidity ratio was 56% at HY20, well above the regulatory minimum of 20%. Concentration is also very low, with top 20 depositors accounting for c.14% of total deposits at HY20.
The negative outlook reflects our banking sector view of the possibility of earnings and asset quality metrics deteriorating beyond expectations, given the COVID-19 strain on the operating environment and the bank’s exposures to vulnerable sectors of the economy. As a result, we expect the NPL ratio to increase to around 7.2%-7.5%, while the GCR capital ratio moderates to around 18% over the rating horizon. The competitive position, funding and liquidity are expected to remain stable.
A downgrade could be caused by sustained higher NPLs and credit losses beyond 7.5% and 1.8% respectively, and a GCR capital ratio below 18%. The ratings may benefit from a strengthened market position, stronger capitalisation, sustained lower NPLs and credit losses, and reduction in foreign currency lending.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
Diamond Trust Bank Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||A+(KE)||Stable||September 2011|
|Short Term issuer||Initial||National||A1(KE)||—||September 2011|
Risk score summary
|Rating Components & Factors||Risk scores|
|Country risk score||3.75|
|Sector risk score||3.50|
|Management and governance||0.00|
|Capital and Leverage||0.50|
|Funding and Liquidity||1.00|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current 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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were 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.
The credit ratings have been disclosed to the rated entity. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Diamond Trust Bank Limited participated in the rating process via teleconference management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from the entities and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Unaudited half year results for 2020;
- Latest internal and/or external audit report to management;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data.