Johannesburg, 30 November 2017 – 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 2018.
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 criteria:
The accorded ratings reflect EADB’s multilateral development bank status, East African Community (“EAC”) focussed development mandate, low rating-based capacity but moderately high member willingness to support, and strong financial profile.
EADB occupies a favourable strategic position, derived from its development mandate in East Africa and equity participation. The EAC Treaty recognises EADB as one of the organs of the EAC, and affords the bank preferred credit status in the region. EADB is owned by most of the member states of the growing EAC comprising Kenya, Uganda, Tanzania and Rwanda, with a combined stake of 87.3% at FY16. 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, further underpins the bank’s ratings.
The bank is well capitalised for current risk levels with a capital to asset ratio of 63.7% at FY16 (FY15: 62.8%). Total capital and reserves grew by 5.1% (FY15: 8.9%) to USD251.2m at FY16, mainly driven by member contributions (USD4.6m) and earnings retention (USD7.0m). A risk adjusted capital adequacy ratio of 58.9% was reported at FY16 (FY15: 60%), indicating strong buffers to absorb additional losses arising from heightened credit/other risks. Furthermore, the large capital buffer provides scope for balance sheet leverage (in furtherance of the development mandate), without negatively impacting the bank’s financial strength. The bank’s leverage ratio of 49.2% at FY16 (FY15: 52.4%) remains modest and much lower than peers. Financial flexibility is further bolstered by the bank’s access to substantial callable capital, amounting to USD842.9m at FY16. The callable capital provides an additional buffer and demonstrates shareholder commitment in the event of financial stress, albeit cognisance is taken of the possible delays in collecting capital from member states.
Asset quality came under pressure in the period under review with gross non-performing loans (“NPLs”) rising to 7.0% of gross loans at FY16 (FY15: 0.7%), mainly driven by a single name default in the hotel/tourism and real estate sector amounting to USD10.3m (or 78% of total NPLs) at FY16. The gross NPL ratio increased to 7.6% at 1H FY17 as the exposure migrated to doubtful status. Specific provisions covered 19.8% of NPLs at 1H FY17 (FY16: 18.2%), pre-collateral. NPLs net of specific provisions remain low relative to capital at 4.7% as at 1H FY17 (FY16: 4.3%). Recovery efforts are ongoing, loans are 1.5 times collateralised and issued in currencies matching borrowers’ income streams.
EADB recorded a profit of USD7.6m for FY16, 13.5% above the FY15 level. The performance was ahead of expectations, supported by growth in interest income, notwithstanding a sharp rise in loan impairment charges and higher operating costs. Overall, the ROaA remained flat at 2%, while the ROaE increased to 3.1% (FY15: 2.9%) in FY16. High liquid asset balances and 141% coverage of external debt (USD123.7m) by cash resources support the bank’s high national scale short-term rating.
The international foreign currency issuer rating is supported by EADB’s charter, diversified shareholding and preferred creditor status ameliorate sovereign interference risk. In addition, due to funding base diversification, the rating has not been constrained by member countries’ sovereign ceilings. For all major international currencies, asset/liability maturities are generally matched. Coverage of USD denominated debt by USD denominated liquid deposits in banks with highly-rated parents/shareholders was 0.7x at FY16 (FY15: 0.5x).
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. However, the ratings would be sensitive to further deterioration 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 2016)||Last rating (November 2016)|
|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|
|Jennifer Mwerenga||Kurt Boere|
|Senior Analyst||Senior Analyst|
|(011) 784-1771||(011) 784-1771|
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 (2012-16)
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 2016 (plus four years of comparative figures)
- Unaudited interim management accounts for the six month period to 30 June 2017
- Budgeted financial statements for 2017
- 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 please click here