Announcements

GCR affirms East African Development Bank’s ratings.

Johannesburg, 28 Nov 2014 – Global Credit Ratings has affirmed the national scale ratings assigned to East African Development Bank of:

Country Long term Short term Rating outlook
Uganda AA(UG) A1+(UG) Stable
Kenya AA(KE) A1+(KE) Stable
Tanzania AA(TZ) A1+(TZ) Stable
Rwanda AA(RW) A1+(RW) Stable

Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to East African Development Bank of BB; with the outlook accorded as Stable. All the above ratings are valid until 11/2015.

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 EADB occupies a favourable strategic position, derived from its development mandate in East Africa and equity participation. The East African Community (“EAC”) Treaty recognises EADB as one of the organs of the EAC. EADB is owned by most of the member states of the growing EAC, comprising Kenya, Uganda, Tanzania and Rwanda, with a combined stake of 84.2% at FYE13. Development Finance Institutions hold the bulk of the remaining shares. EADB enjoys a de jure preferred creditor status in the region.

During F13, the African Development Bank (“AfDB”) subscribed for additional ordinary share capital totalling US$24m in the form of paid up capital (US$10m) and callable capital (US$14m). The transaction increased AfDB’s shareholding to 11.0% from 6.8%. AfDB also became the first non-member/institutional shareholder to subscribe to callable capital in line with the recently amended charter. The confidence shown by AfDB, a highly rated multilateral development bank, is an important support mechanism to the Bank’s rating.

EADB is well capitalised for current risk levels with a capital to asset ratio of 69.8% at FYE13. Total capital and reserves grew by 15.0% to US$166.1m at FYE13, supported by paid up capital receipts (US$14.6m) from shareholders and earnings retention (US$7.0m). A risk adjusted capital adequacy ratio of 72.8% was reported as at FYE13, calculated in line with Basel II requirements. Although capitalisation should steadily decline in line with planned growth in risk assets, capital buffers are large enough to ensure continued strong capitalisation. Financial flexibility is further bolstered by the Bank’s access to substantial callable capital, amounting to US$654.6m at FYE13. 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 indicators continued to strengthen following the successful execution and delivery of the Bank’s de-risking plan incorporating the recovery/write-off of legacy loans and the ongoing tightening of risk management processes. The gross non-performing loans ratio closed the year at 1.6% from a high of 32.0% at FYE10. Arrears amounting to US$1.7m at FYE13 were more than fully covered by provisions. However, going forward, cognisance is taken of the uncertain and challenging economic environment in member states, and the impact on borrowers’ abilities to honour repayments as the Bank expands its loan book.

A pre-tax profit of US$7.0m was recorded for F13, down by 3.9% (reflecting a broad decline in market interest rates on the Bank’s treasury portfolio) from F12, although well above expectations. The ROaE and ROaA declined to 4.5% (F12: 5.7%) and 3.2% (F12: 3.6%) respectively in F13. EADB’s balance sheet is highly liquid, underpinning its high national short term ratings.

EADB’s charter and diversified shareholding ameliorates sovereign interference risk. For all major international currencies, asset/liability maturities are generally matched. Due to the diversity of the funding base, the international rating has not been constrained by the country ceilings of member countries. Despite the noted changes in the shareholder profile, there was no material impact on the international scale rating.

GCR has noted the operational changes in the business, including the enhanced shareholding/funding profile, improved asset quality, and high liquidity and capital metrics. The appropriate deployment of capital/funding coupled with a positive trend in key risk metrics, as the Bank scales up its operations and development mandate, may have a positive impact on the ratings. A weakening of asset quality indicators exacerbated by deteriorating economic and regulatory environments across member countries and the spill over effects of a weak global market could lead to negative rating action.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATING HISTORY
Initial rating (Nov/2012) Initial rating (Nov/2012)
Long term: AA(UG), (KE), (TZ), (RW) Long term: BB-
Short term: A1+(UG), (KE), (TZ), (RW)
Outlook: Stable Outlook: Stable
Last rating (Nov/2013) Last rating (Nov/2013)
Long term: AA(UG), (KE), (TZ), (RW) Long term: BB
Short term: A1+(UG), (KE), (TZ), (RW)
Outlook: Stable Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Jennifer Mwerenga
Senior Credit Analyst
(011) 784-1771
jennifer@globalratings.net

Committee Chairperson
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Banking Criteria (updated April 2014)
Previous Rating Reports (up to 2013)

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.

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.

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 rating/s has 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 the 31 December 2013 audited annual financial statements (plus four years of comparative numbers), latest internal and/or external management reports, 2014 budgeted financial statements, 30 September 2014 management accounts, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

Asset Quality

The ability of a bank’s assets, especially its loans, to continue to perform according to its terms and generate net interest income for the bank.

Balance Sheet

Basic financial statements, usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity’s assets, liabilities and owners’ equity. Also known as a statement of financial position.

Basel

Basel Committee on Banking Supervision housed at the Bank for International Settlements.

Capital Adequacy

A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.

Capital and reserves

Shareholders equity.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

Financial Institution

An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.

Financial Statements

Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time and its results of operations for a period then ended.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Interest Rate

The amount paid by a borrower to a lender in exchange for the use of the lender’s money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

Non-performing loan

When a borrower is overdue, typically 90 + days in arrears or as defined in the transaction documents.

Risk Management

Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.

Risk Management Process

Risk management is the identification, assessment, and prioritisation of risks, followed by coordinated and economical application of resources to minimise, monitor, and control the probability and/or impact of unfortunate events or to maximise the realisation of opportunities.

Sovereign Risk

The risk of default by the government of the country on its obligations.

Write-off

The total reduction in the value of an asset.

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