Johannesburg, 29 September 2017 – Global Credit Ratings has affirmed Eastern and Southern African Trade and Development Bank‘s national scale ratings 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 upgraded Eastern and Southern African Trade and Development Bank‘s long term international scale foreign currency rating to BBB-; with the outlook accorded as Stable. The ratings are valid until September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Eastern and Southern African Trade and Development Bank (“TDB”, “the Bank” – formerly “PTA Bank”) based on the following key criteria:
The upgrade of TDB’s international scale long term foreign currency rating (“ISR”) reflects the Bank’s securing of timely support in the event of a call on callable capital through insurance cover from highly rated international counterparties. In addition, recent enhancements to the Bank’s risk management policies and functions have helped to improve asset quality. The ISR is not constrained by the country ceilings of member states due to the diversity of the Bank’s funding/support base, and credit enhancement undertakings by the Bank with investment grade rated insurers.
TDB enjoys a favourable strategic position on the African continent, derived from its development mandate and broad equity participation (comprising 10 institutional investors, 20 African governments (following the entry of Swaziland in 2017), and the governments of China and Belarus from outside the region). Given the shareholder diversity and the provisions of the Bank’s Charter (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 highly experienced management team underpin its leverage with governments in the region.
Total capital and reserves grew by 16.3% to USD856.5m at FY16, supported by equity subscriptions (USD40.5m) from new and existing shareholders and earnings retention (USD77.1m). The equity base grew further to USD922.9m at 1H FY17. Financial flexibility is further bolstered by the Bank’s access to callable capital, 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. To reduce the risk of non-payment or delays in receiving capital from non-investment grade rated shareholders, the Bank secured a five-year credit insurance policy of USD630m to timeously cover callable capital obligations from selected key non-investment grade rated shareholders. Based on FY16 callable capital of USD1.3bn, this effectively raises callable capital from investment grade shareholders to c.65% (FY15: c.15%).
TDB’s capital adequacy ratio (“CAR”) was 32.9% at 1H FY17 (FY16: 37.0%; FY15: 39.1%), which remains above the Bank’s internal minimum of 30%. Management of the Bank demonstrated that they have mechanisms in place to manage the CAR within the optimal range of 30%-35%. The Bank’s leverage ratio (debt/equity) declined to 369% at FY16 (FY15: 415%) and further improved to 365% at 1H FY17.
The Bank’s non-performing loan ratio decreased to 2.4% at 1H FY17 (FY16: 2.8%) from 5.2% at FY12 (FY15: 2.9%). Furthermore, past due but not impaired loans decreased to 3.0% (FY15: 8.9%) of gross loans at FY16. The improvement in loan book quality is attributed to the strengthening of risk management policies and practices, as well as higher write-offs. Despite challenging economic conditions and political risks in some member countries, GCR expects asset quality to remain sound given the Bank’s reduced risk appetite and improved loan origination processes.
The group maintained its healthy profitability record in FY16 after posting a profit of USD101.5m, which equated to growth of 7.1% year-on-year. Although ROaE reduced to 13.5% (FY15: 14.4%) in FY16, it remained above the Bank’s internal target of 10%. The reduction in ROaE is attributed to new equity which was injected in the later part of the year. Overall, the Bank’s earnings remain high compared to other MDBs in GCR’s rating universe.
As borrowings are mainly utilised to finance loans of comparable maturities, TDB exhibits low liquidity risk, with cumulative liquidity buffers maintained across all maturity buckets at FY16.
Maintaining recent improvements in asset quality and risk management, combined with a stronger shareholder profile and level of callable capital from investment grade shareholders, as well as further diversification of the loan portfolio, could lead to an improvement in the ISR. A sharp deterioration in profitability, liquidity, capital 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 2016)||Last rating (September 2016)|
|Long term: AAA(KE); Short term: A1+(KE)||Long term: BB+|
|Outlook: Stable||Outlook: Positive|
|Primary Analyst||Committee Chairperson|
|Kurt Boere||Eyal Shevel|
|Senior Credit Analyst||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Global Criteria for Rating Multilateral Development Banks (September 2017)
PTA Bank/TDB rating reports (2004-16)
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 process 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 ratings.
- Audited financial results of the Bank as at 31 December 2016 (plus four years of comparative figures)
- Unaudited interim results of the Bank as at 30 June 2017
- Budgeted financial statements for 2017
- 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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|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 please click here
GCR affirms Eastern and Southern African Trade and Development Bank’s rating of AAA(KE); Outlook Stable.