Johannesburg, 18 August 2021 – GCR Ratings (“GCR”) has affirmed East African Development Bank’s international scale long and short-term issuer ratings of BBB- and A3 respectively, with the outlook accorded as Stable. At the same time, the following long and short-term national scale issuer ratings have been affirmed:
- Kenyan National Scale ratings at AAA(KE)/A1+(KE), with outlook accorded as Stable.
- Rwandan National Scale ratings at AAA(RW)/A1+(RW), with outlook accorded as Stable.
- Tanzanian National Scale ratings at AAA(TZ)/A1+(TZ), with outlook accorded as Stable.
- Ugandan National Scale ratings at AAA(UG)/A1+(UG), with outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|East African Development Bank||Long term issuer||International||BBB-||Stable Outlook|
|Short term issuer||International||A3|
The ratings on East African Development Bank (‘EADB’, ‘the bank’) balances its geographical risk concentrations, preferred creditor treatment (‘PCT’), fairly strong mandate but with a weakening track record, very strong capitalisation, good risk position, modest funding structure versus supranational peers and robust liquidity. The ratings are constrained by the relatively weak overall creditworthiness of its member states, in addition to rising operating environment risks of the African continent, especially in light of the current global pandemic.
The operating environment factors in concentration of developmental exposures to a relatively stronger grouping of East African countries, a less diverse sovereign membership base, and adequately demonstrated track record of preferential treatment, which we think is evidence of the relevance and importance of this institution to its shareholders. However, the balance sheet is exposed to the high operating environment risks of East Africa. We believe these risks remain elevated, reflecting the direct and indirect impact of the COVID-19 pandemic.
EADB is a relatively small regional Multilateral Development Bank (‘MDB’) established with a mandate to promote socio-economic development and regional integration in East Africa. Its modest size, measured by the loan book of just over USD133m at FY20, is a relative strain to its ability to play a significant countercyclical role and self-fund very large infrastructure or developmental projects. Consequently, we moderate the mandate and track record assessment for limited growth of the development book, and we may moderate further should the loan book continue to contract. Nonetheless, we still view the mandate to be broad and strong due to its clearer development impact outcomes underpinned by its focus on higher risk, earlier stage projects including equity finance for start-ups.
Capital and leverage is ratings positive, reflected in the GCR leverage ratio of over 73% as at FY20. We expect the 12-18 months forward looking leverage ratio to hold above 70% as weak credit conditions in the region continues to underpin a limited risk asset growth. Earnings dipped in FY20 in line with our expectations, as operating revenues declined 7% on the back of lower disbursements and softer interest rate environment. However, we expect to see a modest improvement in earnings over the next 12-18 months, underpinned by a decent disbursement pipeline, contained credit losses, and the projected interest rate hikes. Moreover, adequate profit retention will continue to support the current strong capital position. Loan loss reserve coverage lowered to 50% at FY20, from 63% at HY20, and still lags rated peers. Lower reserving is supported by the over collateralised loan book at 2.6x and factoring in additional reserving would still have an immaterial impact on the capital ratio.
The risk position is slightly ratings positive, balancing loan concentrations, relatively high albeit improving NPLs, and very low credit losses to that of peers. Impairments registered slightly higher at 0.3% for FY20, up from 0.1% the prior year, normalising to a level observed through the cycle. On the other hand, the bank has historically reported higher NPLs than peers, although the current trend reflects some recovery close to the peer range of 3-4%. The reduction in NPLs is attributed to increased recoveries and no new migration of borrowers into NPL status. The impact of COVID-19 on the loan portfolio continues to be marginal, with most stage 2 borrowers gradually recovering on the back of eased government restrictions. Loan concentrations are high, with the top twenty loans accounting for c.92% of total loans at FY20. Given the current restrictive lending practices, impairments are expected to remain well below 1% over the next 12-18 months. Market risk is minimal with limited equity investments, and FX lending risks are well managed using natural hedging and PCT when needed.
Funding and liquidity assessment balances a modest funding structure versus supranational peers and the robust liquidity. Funding sources are less diverse (although noting improving diversification) with limited proven access to international loans and debt capital markets. Liquidity on the other hand is kept at robust levels reflected by a negative net debt position as at FY20. The liquidity coverage of interest-bearing debt was c.3x over the same period. Asset concentration is high with c.85% of liquid assets in local institutions, however, these are strong rated counterparties (in the regional context), and the short maturity profile of the bank placements underpins negligible credit losses.
The outlook is stable reflecting our opinion that the bank has capacity to carry out its mandate considering the pandemic, supported by a strong balance sheet. We also factor in the relevance and importance of the bank to its shareholders which we think remains supportive of the ratings. Sustained low credit losses, coupled with capital and liquidity managed within adequate to strong levels also supports a stable outlook.
The ratings could be lowered if the strength of shareholders reduce, or if the mandate track record diminishes on the back of a sustained reduction of the bank’s development book, substantial deterioration in capital, credit losses exceed our expectations, and/or there is an increase in funding and liquidity risks. The upside movement in ratings is limited but may benefit from a growing development book, more examples of PCT, and reduction in loan concentrations. Reduction in geographical concentrations to weak operating environments would also be viewed positively.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|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 Supranational Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2021|
|GCR Financial Institutions Sector Risk Score, July 2021|
East African Development Bank
Risk Score Summary
|Rating Components and Factors||Risk score|
|Country risk score||3.75|
|Sector risk score||3.25|
|Membership Strength and Diversity||2.50|
|Preferential Creditor Treatment||3.00|
|Status and diversity||(1.00)|
|Mandate and track record||2.00|
|Management and governance||0.00|
|Capital and leverage||5.00|
|Funding structure 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.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
EADB participated in the rating process via virtual 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 EADB and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2020;
- Breakdown of loan book and funding as at December 2020;
- Latest internal and/or external audit report to management;
- Industry comparative data.