Announcements Financial Institutions Rating Alerts

GCR affirms Diamond Trust Bank Limited’s national scale issuer ratings of A+(KE)/A1(KE); Negative Outlook

Rating Action

Nairobi, 12 October 2021 – 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 negative outlook maintained.

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)

Rating Rationale

The ratings on Diamond Trust Bank Limited (‘DTB’, ‘the bank’) reflect the strengths and weaknesses of the DTB Group (‘the group’). The group has a solid market position, strong capitalisation, average risk position, and good funding and liquidity profile. The negative outlook reflects i) our expectation of sustained high levels credit losses in the next 12-18 months given the rise in non-performing loans (“NPLs”), ii) the low levels of loan loss reserving, and iii) the low growth in earnings.

DTB is positioned among the top tier banks in Kenya’s fragmented banking sector, largely serving corporates and small medium enterprises (‘SMEs’). The bank has a fairly strong domestic franchise, reflected by its share of industry deposits and assets of 5.3% and 5.5%, respectively, at 1H21. On the regional diversification, the franchise benefits from banking subsidiaries in Tanzania, Uganda, and Burundi, which hold competitive market positions to compete with subsidiaries of domestic peers. The regional subsidiaries have continued to grow over the years contributing 30% and 18% of the group’s assets and profit before tax (‘PBT’) as at 1H21. The franchise strength is relatively weakened by the cost of funding the balance sheet (4.0% at 1H21), which compares less favourably to some of the top tier banks that raise funds at a cost of around 2.5%-3.0%. Our business profile assessment also factors in a good track record of revenue stability, favourable levels of product diversification, coupled with decent governance structures.

Capitalisation is positive to the ratings. The group’s GCR total capital ratio is moderate at c.20.1% as at 1H21, balancing the highly capitalised Kenyan entity and the relatively lower capitalised subsidiaries. We expect capitalization to remain stable over the next 18-24 months although the impact of elevated credit losses could weaken the capital position. Our capital and earnings assessment balances the anticipated risk assets growth and a healthy internal capital generation. Internal capital generation is good at levels of 10% over the last 3 years on average and we project stability on internal capital generation in the next 12-18 months despite a low interest rates environment. However, we note that the total loan loss reserve coverage of NPLs declined to c.54% at 1H21 down from c.60% in 1H20, which is below the sector average. We have moderated the capitalisation score to reflect the impact of an increased in loan loss reserves is probable to have on earnings and consequently the capital position. Assets are expected to return a lower 1.5%-1.8% over the next 2 years, down from the 2.0%-2.5% range reported over the last 4 years.

Risk position is a neutral ratings factor. Credit losses improved to 2.2% in 1H21, down from 3.4% FY20, following recovery in the loan book performance as severe credit risk conditions linked to COVID-19 alleviated. The restructured portion of the loan book improved from 37% in FY20 to 33% in 1H21. However, management noted that the hospitality and tourism business segments which accounted for 29% of the total restructured loans as of 1H21, required further moratorium with maximum tenor set at 12 months. NPLs have gradually edged higher (10.0% at 1H21) but we expect the ratio to remain stable in the next 12-18 months while sticking below the sector average. The group’s loan book is fairly diversified by sector, but with notable concentrations to manufacturing (16%), real estate (19%), and trade (23%). We view some of these sectors (real estate in particular) as vulnerable and may potentially weigh on the bank’s NPLs over the medium term. We expect credit losses to remain relatively high at levels of 2.0%-2.2% to improve the coverage position moving forward while impact earnings negatively. However, we believe the 1.5x collateralisation on the loan book provides sufficient credit enhancement to mitigate the downside risk.

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 USD liquidity crunch. 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 robust levels of liquidity. The funding structure is considered stable given the stickiness of term deposits and a diversified depositor base. However, we view the funding costs of the group to be relatively higher comparative to peers due to high reliance on term deposits. The group is predominantly funded by customer deposits accounting for 90% of the funding as at 1H21 while the long-term stable funding ratio is at levels >100%. The liquidity ratio was 62% at 1H21, well above the regulatory minimum of 20%. Concentration is also very low, with top 20 depositors accounting for c.13% of total deposits at 1H21.

Outlook Statement

The negative outlook reflects i) our expectation of sustained high levels credit losses in the next 12-18 months given the rise in non-performing loans (“NPLs”), ii) the low levels of loan loss reserving, and iii) dismal growth in earnings. As a result, we expect credit losses to remain high at levels of 2.0%-2.2%, NPL ratio to stabilize at levels of 10.0%-10.5%, while the GCR capital ratio stabilizes at around 18%-20% over the rating horizon. The competitive position, funding, and liquidity are expected to remain stable.

Rating Triggers

A downgrade could be caused by sustained higher NPLs and credit losses beyond 12.0% and 3.0%, 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.

Analytical Contacts

Primary analyst Dennis Kariuki Senior Analyst
Nairobi, KE DennisK@GCRratings.com +254 70 304 1618
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@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, October 2021
GCR Financial Institutions Sector Risk Score, September 2021

Ratings History

Diamond Trust Bank Limited

Rating class Review Rating scale Rating class Outlook Date
Long Term issuer Initial National A+(KE) Stable September 2011
Last National A+(KE) Negative October 2020
Short Term issuer Initial National A1(KE) — September 2011
Last National A1(KE) — October 2020

Risk score summary

Rating Components & Factors Risk scores
Operating environment 7.25
Country risk score 3.75
Sector risk score 3.50
Business profile 1.00
Competitive position 1.00
Management and governance 0.00
Financial profile 1.25
Capital and Leverage 0.25
Risk 0.00
Funding and Liquidity 1.00
Comparative profile 0.00
Group support 0.00
Government support 0.00
Peer analysis 0.00
Total Score 9.50

Glossary

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 2020;
  • Unaudited half year results for 2021;
  • Latest internal and/or external audit report to management;
  • A breakdown of facilities available and related counterparties; and
  • Industry comparative data.


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2022 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.