Announcements

GCR affirms Eastern and Southern African Trade and Development Bank’s rating of AA+(KE); Outlook S

Johannesburg, 30 Sep 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Eastern and Southern African Trade and Development Bank of AA+(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 rating assigned to Eastern and Southern African Trade and Development Bank of BB+; with the outlook accorded as Stable. The rating(s) are valid until 09/2015.

SUMMARY RATING RATIONALE

G

lobal Credit Ratings (“GCR”) has accorded the above credit rating(s) to Eastern and Southern African Trade and Development Bank (“PTA Bank” or “the Bank”) based on the following key criteria:

PTA Bank occupies a favourable strategic position, derived from its development mandate and equity participation (comprising three institutional investors, 18 African governments, and the governments of China and Belarus). Given the shareholder diversity and the provisions of the Bank’s Charter, the level of sovereign interference risk is considered to be relatively low. The Bank’s unique trade and development expertise and experienced management team underpins its leverage with governments in the region. During F13, the African Development Bank (“AfDB”) increased its stake in the Bank following a US$20.0m capital injection for Class B shares. Aside from boosting the capital base, the confidence shown by AfDB, a highly rated multilateral development bank, is an important support mechanism to the Bank’s rating.

The Bank is well capitalised with a risk weighted capital adequacy ratio of 34.7% as at FYE13, calculated in line with Basel II requirements (internal minimum 30.0%). Total equity grew by 38.6% to US$477.0m as at FYE13, supported by paid up capital receipts (US$66.1m) from shareholders and earnings retention (US$66.6m). Financial flexibility is further bolstered by the Bank’s access to substantial callable capital (US$1.1bn) which provides a significant degree of support. The callable capital acts as a guarantee to the Bank’s borrowings. Notwithstanding the 29.2% growth in non-performing loans (“NPLs”) to US$92.5m in F13, gross NPLs declined to a review period low of 4.4%, due to loan growth (52.2%). Arrears coverage (specific provisions) decreased slightly to 65.8% at FYE13 (FYE12: 67.5%). Net NPLs remained negligible as a percentage of capital at 6.6% as at FYE13 (FYE12: 6.8%). Although NPLs are generally well secured, realising security throughout the region has been challenging. Cognisance must also be taken of the general lag in the arrears experience following rapid advances growth. The period under review saw pre-tax profit rise by 30.1%. This trend has been carried forward into F14, with pre-tax profit for the first six months increasing by 37.8% over the comparable period in the previous year. 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 as at FYE13.

PTA Bank’s charter and well-diversified shareholding ameliorates sovereign interference risk. The majority of cash and liquid assets are US Dollar denominated and placed with reputable counterparties with high international ratings. Additionally, 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.

Continued solid financial performance while maintaining credit protection factors, diversification of the loan portfolio and a further strengthening of the shareholding and equity base could lead to an upward ratings migration. Conversely, a weakening of asset quality indicators exacerbated by deteriorating economic environments across member countries and the spill over effects of a weak global market, as well a further rise in loan concentration risk, could exert downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATING HISTORY
Initial rating (Nov/2004) Initial rating (Nov/2004)
Long term: AA(KE); Short term: A1(KE) Long term: BB
Outlook: Stable Outlook: Stable
Last rating (Sep/2013) Last rating (Sep/2013)
Long term: AA+(KE); Short term: A1+(KE) Long term: BB+
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)
Kenya Bank Statistical Bulletin (June 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, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

The 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 rating/s has been disclosed to The Eastern and Southern African Trade and Development Bank with no contestation of the rating.

The information received from The Eastern and Southern African Trade and 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 June 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.

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.

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.

Diversification

The principle that a portfolio in which assets are separated into different industry sectors, geographic regions and firms will embody less overall risk than one in which assets are concentrated into a few sectors, regions and firms.

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.

Liquid Assets

Assets, generally of a short term nature, that can be converted into cash.

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.

Sovereign Risk

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

GCR affirms Eastern and Southern African Trade and Development Bank’s rating of AA+(KE); Outlook Stable.

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