Johannesburg, 30 November 2018 – Global Credit Ratings has affirmed the foreign currency international scale rating assigned to East African Development Bank of BB+, with the outlook accorded as Stable. Furthermore, Global Credit Ratings has revised the long term and short term national scale ratings assigned to East African Development Bank to AAA(UG),(KE),(TZ),(RW) and A1+(UG),(KE),(TZ),(RW) respectively, with the outlook accorded as Stable. The ratings are valid until November 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to East African Development Bank (“EADB”, “the bank”) based on the following key assumptions:
The accorded ratings reflect EADB’s multilateral development bank (“MDB”) status, moderate competitive position, and strong financial profile balancing a concentrated funding structure with a very strong liquidity position, very strong capital and leverage, and a moderate risk position.
The bank’s competitive position is moderate relative to other MDBs operating throughout Africa. This reflects its more concentrated sovereign membership base and small geographical mandate.
The bank’s funding structure is concentrated, with its current funding being lines of credit from eight financial institutions at FY17, positively, EADB’s liquidity is very strong with a liquidity ratio of 314%, and broad liquid assets over total wholesale funding coverage of 1.4x at FY17.
EADB’s capital and leverage is considered to be very strong, with a GCR leverage ratio (total capital / total assets) of 66.9% at FY17, in comparison to 17.8% and 19.4% for African Export Import Bank (“Afrexim bank”), and Eastern and Southern African Trade and Development Bank (“TDB bank”) respectively. GCR expects EADB’s capital position to be marginally less conservative in the long term, slightly exceeding the 1.5x mark (capital coverage of outstanding loans etc.) within 3 years. This reflects our expectation that the bank will fund more projects in tandem with the expected economic growth in East Africa.
The bank’s credit risk is moderate, with a gross non-performing loan (“NPL”) ratio of 6.2% at 1H18 (FY17: 8.3%), compared to 2.4% and 2.5% in FY17 for TDB bank and Afrexim bank respectively. However, cognisance must be taken of the long-term nature of the finance (arguably more catalytic in nature) provided by EADB versus the trade finance which is provided by TDB bank and Afrexim bank. At the same time, the bank has made material write-offs over the past nine months as a result of IFRS 9. The loan book is concentrated with the single largest and top 10 largest borrowers accounting for 15.2% and 68.9% of the total loan book, respectively. Positively, the large capital base somewhat mitigates this risk, with the 10 largest borrowers accounting for 52.2% of capital.
Implementation of IFRS 9 resulted in an additional USD29.3 million impairment provision, reducing capital through lower retained earnings. However, this improved loan loss reserving materially.
A material strengthening of the bank’s competitive position, driven by an increase in scale and shareholder capacity may result in positive ratings action. Material deterioration in the bank’s financial profile without the corresponding growth in developmental activities according to mandate, may result in negative ratings action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (November 2012)||Initial rating (November 2012)|
|Long-term: AA(UG),(KE),(TZ),(RW); Short-term: A1+(UG),(KE),(TZ),(RW)||Long-term: BB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2017)||Last rating (November 2017)|
|Long-term: AA+(UG),(KE),(TZ),(RW); Short-term: A1+(UG),(KE),(TZ),(RW)||Long-term: BB+|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Thandolwenkosi Mkwanazi|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Multilateral Development Banks, updated September 2017
EADB rating reports (2012-17)
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 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 rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
East African Development Bank 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 East African Development Bank.
The information received from East African Development Bank and other reliable third parties to accord the credit rating included:
- Audited annual financial statements of the bank at 31 December 2017 (plus four years of comparative figures);
- Unaudited interim management accounts for the six-month period to 30 June 2018;
- Latest internal and/or external audit report to management;
- Corporate governance and enterprise risk framework;
- A breakdown of facilities available and related counterparties; and
- Industry comparative data and regulatory framework.
The ratings above were solicited by, or on behalf of, East African Development Bank, 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||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.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Callable||A provision that allows an Issuer to repurchase a security before its maturity.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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||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.|
|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 Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account (including taxes).|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|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.|
For a detailed glossary of terms please click here