Johannesburg, 30 September 2016 – Global Credit Ratings has affirmed the national scale ratings assigned to Eastern and Southern African Trade and Development Bank of AAA(KE) and A1+(KE) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale foreign currency (“FC”) rating assigned to Eastern and Southern African Trade and Development Bank of BB+; with the outlook accorded as Positive. The ratings are valid until September 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Eastern and Southern African Trade and Development Bank’s (“PTA Bank”, “the Bank”) based on the following key criteria:
The accorded ratings reflect PTA Bank’s favourable strategic position on the African continent, derived from its development mandate and broad equity participation (comprising 10 institutional investors, 19 African governments (following the entry of Mozambique and SACOS Group Limited from Seychelles in early 2016), and the governments of China and Belarus from outside the region). Given the shareholder diversity and the provisions of the Bank’s Charter (eg, limiting any single shareholding to 15%), the level of sovereign interference risk is considered to be relatively low. The Bank’s unique trade and development expertise and experienced management team underpin its leverage with governments in the region.
Total capital and reserves grew by 18.4% to USD736.3m at FYE15 (FYE14: 30.4%), supported by equity subscriptions (USD38.9m) from new and existing shareholders and earnings retention (USD72.9m). Achieving core capital growth through expanded membership and institutional investors to support growth strategies remains key. In this regard, the Board of Governors (“BOG”) approved an increase in the Bank’s authorised capital in 2012 from USD2bn to USD3bn to facilitate the entry of Class B ordinary shares. Since then, eight new institutional (mostly pension funds) and two existing (African Development Bank and China) shareholders have subscribed to Class B shares (USD96m at FYE15). Financial flexibility is further bolstered by the Bank’s access to substantial callable capital (USD1.2bn), which acts as a guarantee for the Bank’s borrowings. The callable capital provides an additional buffer and demonstrates shareholder commitment in the event of financial stress (albeit cognisance is taken of possible delays in collecting capital from some member countries). PTA Bank remains well capitalised reporting a risk-adjusted capital adequacy ratio of 39.1% at FYE15 (FYE14: 33.7%), calculated in line with Basel II requirements (internal minimum 30%). The leverage ratio (debt/equity) declined to 414.7% in F15 (F14: 445.2%) and further to 351% at 1H F16, although remaining well above peers.
Asset quality is under significant pressure from subdued economic activity and negative trends in macroeconomic conditions (including weak commodity prices, currency depreciation and declining foreign exchange reserves) across the region, impacting key sectors such as agribusiness and petrochemicals. Impaired loans grew by 10.1% to USD86.2m at FYE15 (FYE14: 15.3% decrease). Notwithstanding this, the gross non-performing loan (“NPL”) ratio decreased slightly to 2.9% (F15: 3.0%) partly moderated by loan growth, write-offs and loan restructuring. Arrears coverage (by specific provisions) increased to 81.8% at FYE15 (FYE14: 72.9%). Consequently, unreserved NPLs remained low relative to capital at 2.1% (F14: 3.4%).
The Bank’s profit grew by 23.4% to USD95m in F15 (F14: 15.5%), with the ROaA and ROaE remaining flat at 2.5% and 14.0% respectively. Given the fact that borrowings are mainly utilised to finance loans of comparable maturities, PTA Bank exhibited low liquidity risk, with cumulative liquidity buffers maintained across all maturity buckets at FYE15.
PTA Bank’s Charter and diverse shareholding ameliorates sovereign interference risk. The majority of cash and liquid assets are US Dollar denominated and placed with reputable counterparties. In addition, 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.
Maintaining profitability and strong asset quality, liquidity and capital metrics would be positively considered. The positive outlook on the international scale rating reflects potential rating uplift from credit enhancement initiatives underway to strengthen the shareholder profile and level of extraordinary support (callable capital) from investment grade shareholders. However, a sharp deterioration in profitability, liquidity, capital/leverage and asset quality ratios associated with worsening economic conditions across member countries, as well as a further rise in loan concentration risk, could negatively impact the Bank’s intrinsic risk profile. Downward pressure could also arise from sovereign rating downgrades that could materially affect support from shareholders.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE FC RATING HISTORY|
|Initial rating (November 2004)||Initial rating (November 2004)|
|Long term: AA(KE); Short term: A1(KE)||Long term: BB|
|Outlook: Stable||Outlook: Stable|
|Last rating (September 2015)||Last rating (September 2015)|
|Long term: AAA(KE); Short term: A1+(KE)||Long term: BB+|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Kurt Boere||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2016)
Global Criteria for Rating Multilateral Development Banks (September 2016)
Kenya Operating Environment Overview (May 2016)
PTA Bank rating reports (2004-15)
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.
Eastern and Southern African Trade and 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 Eastern and Southern African Trade and Development Bank with no contestation of the rating.
- Audited financial results of the Bank as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the Bank as at 30 June 2016
- Budgeted financial statements for 2015 and 2016
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, Eastern and Southern African Trade and 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
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Basel I||Basel Committee regulations, which set out the minimum capital requirements of financial institutions with the goal of minimising credit risk.|
|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.|
|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.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Guarantee||An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|International Scale Rating FC||International foreign currency (International FC) ratings measure the ability of an organisation to service foreign currency obligations, taking into account transfer and convertibility risk.|
|Investment Grade||Credit ratings equal to or higher than ‘BBB-’.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|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
GCR affirms Eastern and Southern African Trade and Development Bank’s rating of AAA(KE); Outlook Stable.