Johannesburg, 30 November 2016 – Global Credit Ratings has affirmed the long term and short term national scale ratings assigned to East African Development Bank of AA+(UG),(KE),(TZ),(RW) and A1+(UG),(KE),(TZ),(RW) respectively, with the outlook accorded as Stable. Furthermore, 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. The ratings are valid until November 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to East African Development Bank (“EADB”, “the bank”) based on the following key criteria:
The ratings of EADB reflect its multilateral development bank (“MDB”) status, East African Community (“EAC”) focussed development mandate, low rating-based capacity but moderately high member willingness to support, and strong financial profile. As an organ of the EAC, 87.1% of EADB’s shares are held by EAC member states (Kenya, Uganda, Tanzania and Rwanda), which have contributed a combined USD74.9m to capital under the current contribution programme (“Programme II”), and afford the bank preferred credit status in the region. International development finance institutions (“DFIs”), most notably the highly-rated African Development Bank (“AfDB”) hold most of the remaining shares. AfDB’s support (through its 8.8% shareholding, callable capital, technical assistance and funding lines, underpins the bank’s ratings.
EADB is well capitalised, with a capital/assets ratio of 62.8% at FYE15. Capital and reserves increased 8.9% to USD239.0m in F15, mainly driven by member contributions and earnings retention. Capital ratios moderated slightly, reflecting the bank’s increased leverage (debt/equity ratio of 52.4% at FYE15 vs. 26.6% at FYE14 as borrowings rose 114.7% to USD125.1m at FYE15) in support of increased lending, but metrics remain very strong. In F15, EADB’s authorised share capital doubled to USD2.16bn, and a contribution schedule is expected to be agreed during 2017. Additional shareholder support is derived from callable capital (USD822.7m at FYE15), which enhanced financial flexibility, while cognisance is taken of possible delays in collecting capital from member states.
Asset quality indicators continued to strengthen in F15, with the gross non-performing loan (“NPL”) ratio falling to 0.7% at FYE15 (FYE14: 1.4%). However, 1H F16 figures indicate a significant uptick in NPLs to 7.3% of gross loans, diminishing provision coverage from 2.0x at FYE15 to 0.2x at 1H F16. Loans are 1.5 times collateralised and issued in currencies matching borrowers’ income streams, but the risk of negative trends in borrowers’ repayment abilities remains a key risk given loan growth (46.3% in F15).
The bank’s F15 net profit declined 32.0% to USD6.7m (F14: USD9.8m), due to a large revaluation gain in F14, higher foreign exchange losses, lower recoveries and higher provisions, broadly in line with budget. ROaA and ROaE declined to 1.8% (F14: 3.6%) and 2.7% (F14: 4.9%), reflecting EADB’s high capital level and liquid asset balances, and modest operating results. 1H F16 results indicate above-budget profitability, which moderate if higher provisions on the rising NPLs are required.
High liquid asset balances and 130% coverage of external debt (USD125.1m) by cash resources support the bank’s high national scale short-term rating. Coverage of USD denominated debt by USD denominated liquid deposits in banks with highly-rated parents/shareholders was 0.5x at FYE15 (FYE14: 2.0x).
The international foreign currency issuer rating is supported by EADB’s charter, diversified shareholding and preferred creditor status, which ameliorate sovereign interference risk. In addition, due to funding base diversification, the rating has not been constrained by member countries’ sovereign ceilings. Currency risk has diminished in F15, as negative currency mismatches have been eliminated by the higher local currency component of borrowings.
A significant increase in scale, shareholder capacity, and funding diversification, together with maintenance of strong asset quality, liquidity and capital metrics, may have a positive impact on the ratings. The ratings would be sensitive to a reduction in asset quality, evidence of a deterioration in the quality of governance, and/or declining shareholder capacity and/or willingness to support the bank.
|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 2015)||Last rating (November 2015)|
|Long-term: AA+(UG),(KE),(TZ),(RW); Short-term: A1+(UG),(KE),(TZ),(RW)||Long-term: BB+|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Omega Collocott||Jennifer Mwerenga|
|Sector Head: Financial Institution Ratings||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Global Criteria for Rating Multilateral Development Banks, September 2016
EADB rating reports (2012-15)
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.
East African Development Bank participated in the rating process via face-to-face management meetings, teleconferences 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 with no contestation of the rating.
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 2015 (plus four years of comparative figures)
- Unaudited interim management accounts for the six month period to 30 June 2016
- Budgeted financial statements for 2016
- Latest internal and/or external audit report to management
- Corporate governance and enterprise risk framework
- Capital management policy
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- 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 utilised in this announcement please click here