Johannesburg, 6 October 2020 – GCR Ratings (“GCR”) has affirmed Eastern and Southern African Trade and Development Bank’s international scale long and short-term issuer ratings of BBB and A3 respectively. At the same time, the Kenyan long and short-term issuer ratings have been affirmed at AAA(KE) and A1+(KE) respectively. The outlooks are Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Eastern and Southern African Trade and Development Bank||Long term issuer||International||BBB||Stable Outlook|
|Short term issuer||International||A3|
|Long term issuer||National||AAA(KE)||Stable Outlook|
|Short term issuer||National||A1+(KE)|
The ratings on Eastern and Southern African Trade and Development Bank (“TDB”, “the Bank”) are supported by its status as one of the influential Multilateral Development Banks (“MDBs”) within the region, fairly diverse regional membership, strong mandate and track record, demonstrated preferential creditor treatment (“PCT”), beyond adequate capitalisation, good risk position, diverse funding and adequate liquidity. The ratings are, however, constrained by the significant exposure to high risk operating environments, especially in light of the current global COVID-19 pandemic, and the relatively weak overall creditworthiness of its member states.
TDB is a fairly large regional MDB, with development related exposures of around USD5.4bln as of June 2020. The Bank’s geographical mandate exposes the balance sheet to the high and rising operating environment risks of the Eastern and Southern Africa. We believe these risks continue to rise, reflecting the direct and indirect impact of the COVID-19 pandemic. In this regard, the Bank’s operating environment score is relatively lower in comparison to peers. Positively, the sovereign membership base is fairly diverse on a regional basis. The proven track-record of preferred creditor treatment is a ratings positive, reflecting the relevance and importance of this institution to its shareholders.
TDB has a respectable status as one of the influential regional MDBs, supported by its size, franchise, and mandate. The mandate has clear and measurable developmental outcomes which the Bank has positively tracked over the last couple of years. TDB secured about USD2bln funding from international Development Finance Institutions (‘DFIs’) during first half of 2020, to support its mandate obligations and help borrowers affected by the global pandemic. The funding is aimed to support trade and infrastructure development and, most importantly, to the sectors hardest hit by the pandemic. Given this growing track record and the diverse and stable membership, the relevance and importance of this institution to its shareholders remains high, in our opinion.
Capitalisation is a positive ratings factor, reflected in the GCR leverage ratio of 20% at HY20. We expect the ratio to drop 50-100 bps over the next 12-18 months, balancing the anticipated growth of the loan book, capital injections, and good, albeit, lower earnings. The current soft interest rate environment, coupled with higher loan loss reserving needs due to the aftermath of the pandemic, is expected to weigh on the Bank’s bottom line earnings with assets forecasted to return a lower 1.6% by year end. Positively, we think the stable cost structure and robust profit retention levels will continue to support the strong capital position. We also provide some uplift to the score for the protection facility insuring c.35%-40% of the Bank’s loan book. The loan loss reserve coverage of over 90% as of June 2020 is considered appropriate given the highly collateralised loan book and minimal clean risk lending.
The good risk position of the Bank remains intact for now, as we expect the COVID-19 shock to weigh on asset quality metrics (albeit slightly) in the short term. Credit losses remained stable at 0.6% as of June 2020 (comparing favourably to rated peers), attributable to excess provisions raised the prior year. We expect cost of risk to decrease to 0.5% in 12-18 months. However, NPLs are expected to increase to the 3-4% neighbourhood. Positively, c.60% of the loan book comprises facilities that are ring-fenced to protect cash flows due to the Bank. Furthermore, 90% of the exposures are secured with good collateral including cash, insurance by A or better rated international insurers, and sovereign backed receivables amongst others. In addition, the Bank’s risk participation program (currently USD750mln) via a first loss guarantee provided by highly rated international financial institutions is considered to be ratings positive. To the downside, loan concentrations are relatively high in comparison to rated peers, with top 20 exposures accounting for c.87% of the total loan book at FY19. Nonetheless, demonstrated PCT and adequate security supports recoveries.
Funding structure is good, consisting of well diversified funding sources from regional and international capital markets. Whereas the significant portion of funding (c.50%) originates from short term facilities, over 70% of the facilities have maturity longer than two years, lessening potential refinancing risks. Liquidity is good, supported by the Bank’s sovereign portfolio (70% of the loan book) which has shown some resilience and repayment obligations continue to be honoured despite the COVID-19 strain.
We provide uplift to the ratings for callable capital. Qualifying callable capital from A- and above shareholders including insured by highly rated counterparties covers net debt by about 25% as at HY20.
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 high. Sustained low credit losses, coupled with capital and liquidity managed within adequate to strong levels also supports a stable outlook.
The ratings may benefit from a growing development exposures book, more examples of PCT, and reduction in single name concentrations pre-risk mitigation. Reduction in geographical concentrations to weak operating environments is also viewed positively. The ratings could be lowered if capital deteriorates, credit losses exceed our expectations, and/or there is an increase in funding and liquidity risks.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@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 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
Eastern and Southern African Trade and Development Bank
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long term issuer||Initial||International||BB||Stable||November 2004|
|Long term issuer||Initial||National||AA(KE)||Stable||November 2004|
|Short term issuer||Initial||National||A1(KE)||November 2004|
|Long term issuer||Last||International||BBB||Stable||December 2019|
|Short term issuer||Last||International||A3||December 2019|
|Long term issuer||Last||National||AAA(KE)||Stable||December 2019|
|Short term issuer||Last||National||A1+(KE)||December 2019|
Risk Score Summary
|Rating Components and Factors||Risk score|
|Country risk score||2.50|
|Sector risk score||2.50|
|Membership Strength and Diversity||3.00|
|Preferential Creditor Treatment||3.50|
|Status and diversity||1.50|
|Mandate and track record||3.00|
|Management and governance||0.00|
|Capital and leverage||3.50|
|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.
TBD 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 information received from TDB and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2019;
- Breakdown of loan book and funding as at June 2020;
- Latest internal and/or external audit report to management;
- Industry comparative data.