Johannesburg, 15 October 2018 – 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 affirmed Eastern and Southern African Trade and Development Bank’s long-term international scale foreign currency rating of BBB-; with the outlook accorded as Stable. The ratings are valid until September 2019.
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 assumptions:
The ratings on TDB are supported by consistency in fulfilling its development mandate boosting shareholder support, strong capitalisation, adequate funding and liquidity, and improving asset quality. The potential of a downside movement in the national scale ratings is viewed highly unlikely. The international scale long term foreign currency rating (“ISR”) is supported by credit enhancement to callable capital through insurance cover provided by highly rated international counterparties. Although the upside to the ISR is limited, downside pressure may stem from weakening shareholder support, deviation from mandate, downgrade of the bank’s insurance counterparties, reduced sovereign lending which in GCR’s view underpins the bank’s preferred creditor status, and the bank’s high risk concentration.
Shareholder support for TDB is strong. As is typical of multilateral development banks (“MDBs”), support comes from callable capital committed by member states. TDB’s callable capital accounted for 75.1% of subscribed capital at FY17. While note is taken that only 14.2% of callable capital is committed by investment grade shareholders, non-investment grade shareholders’ obligations are credit insured by highly rated international insurers. This build-up of credit enhancement to callable capital is viewed broadly positive. In addition, because of TDB’s mandate to promote economic and social development within the region, the willingness of member states to support the bank when needed remains high in GCR’s view.
Capitalisation is strong, supported by increased member contributions, overlay of new members, and good earnings generation. Capital adequacy ratio (“CAR”) registered 34.5% at 1H18, down 260bps from FY17 however remaining above internal minimum threshold of 30%. Significant headroom of CAR above debt covenant minimum of 25% is viewed positively. Equity growth was 19.3% vs 17.5% growth in loans in FY17. 1H18 performance continues to trend within positive range, with net interest income growing 7% YoY albeit cost of funding pressure persists. Impact of IFRS 9 implementation was minimal, with impairment charge increasing 10% YoY to account for 15.1% of total operating income at IH18, up 10bps from 1H17. We think credit losses will trend within expected range and not have material impact on earnings over the rating horizon. Overall, we expect CAR to trend within past observed ranges.
Funding and liquidity are adequate. The bank maintains a low risk liquidity structure underpinned by the structured credit products offered. The trade finance book (68% of total loan book) consist of self-liquidating structured facilities. Cash flows are ring fenced with maturities of assets staggered to match liabilities resulting in positive liquidity gaps across all maturity buckets. However, refinancing needs are viewed to be high given that significant portion of funding is short term.
Asset quality continues to improve on the back of strengthened credit risk management at onboarding and portfolio management. The non-performing loans “NPL”) ratio decreased to 2.4% at 1H18 although we remain cautious in respect of the increase (77%) in special mention loans. Exposure to sovereigns (governments and parastatals) accounted for 64% of the total loan portfolio at FY17 (67% at 1H18). Sovereign exposures benefit from preferred creditor status (implied in the bank’s charter) which increases recovery prospects on impaired loans.
Risk concentration is moderately high. High risk concentration is a common feature of MDBs and this risk is acute for TDB, whose five largest exposures accounted for 195.4% of equity and 51% of total loans. High quality collateral and provision coverage on these exposures is viewed broadly positive nonetheless.
Although an upward rating movement is unlikely over the rating horizon, a material improvement in the shareholder profile, reduction in concentration of exposures with adverse macro conditions pre-risk mitigation, and improvement of the economic environment within the region is viewed as broadly positive. Downside pressure may stem from weakening shareholder support, deviation from mandate, downgrade of the bank’s insurance counterparties, increased concentration in countries with adverse macro conditions, increased private sector exposures, elevated leverage, and or weakening asset quality.
|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 2017)||Last rating (September 2017)|
|Long term: AAA(KE); Short term: A1+(KE)||Long term: BBB-|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Matthew Pirnie|
|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 2017)
Global Criteria for Rating Multilateral Development Banks (September 2017)
PTA Bank/TDB rating reports (2004-17)
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 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.
- Audited financial results of the Bank as at 31 December 2017 (plus four years of comparative figures);
- Unaudited interim results of the Bank as at 30 June 2018;
- Budgeted financial statements for 2018;
- Latest internal and/or external audit report to management; and
- A breakdown of facilities available and related counterparties.
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.|
|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.|
|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.|
|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.|
|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.