Announcements

GCR affirms Equity Bank Limited’s rating of AA-(KE); Outlook Stable.

Johannesburg, 1 Sept 2014 – Global Credit Ratings has today affirmed the national scale ratings assigned to Equity Bank Limited of AA-(KE) and A1+(KE) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 08/2015.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Equity Bank Limited based on the following key criteria:

The accorded ratings reflect Equity Bank Limited’s (“Equity” or “the group”) established domestic and regional franchise value, resilient financial performance, and solid liquidity and capitalisation. These are, however, partially offset by shifts in both global and domestic risk dynamics, which continue to negatively impact the local economy as well as cross border operations in South Sudan, Rwanda, Uganda and Tanzania.

The ratings also reflect GCR’s view that, as a systemically important financial institution (second largest domestic retail bank) in Kenya with a market share of 8.2% of banking industry deposits as at FYE13, support from the regulatory authorities, in case of need, is highly likely.

The group has a strong management team with demonstrated ability that has positioned Equity as one of the most prominent players in the region, supported by an inclusive regional consumer and small-to-medium enterprises (“SMEs”) financial services franchise.

Equity’s capital position remained strong, with a risk weighted capital adequacy ratio of 25.7% as at FYE13, which was well above the regulatory minimum of 12%. However, beginning January 2015, banks are required to maintain an additional capital conservation buffer of 2.5%, effectively increasing banks’ minimum regulatory capital to 14.5%. In addition, banks are required to allocate capital for market and operational risk with effect from January 2014. Internal computations show that the group has sufficient capital buffer to comply with the new requirements.

Asset quality came under pressure during F13, with the non-performing loans (“NPLs”) position increasing to 5.2% of gross advances, compared to 3.1% previously (industry average 5.2%). The deterioration was largely attributed to the lag effects of the high interest rates experienced in 2011 and 2012 and the impact of stalled government payments to creditors (during the transition to a devolved government post elections), although the situation has improved and government is reducing the backlog. Provisions covered 51.5% of arrears, down from 78.9% in F12, pre-collateral. Coverage increases to 118.7% (F12: 92.9%) after taking into account collateral. However, the reality of long time delays (cumbersome legal processes) and the costs involved with converting collateral into cash is considered a pressure point. Net NPLs remained small relative to net advances and capital at 2.6% and 7.5% respectively.

Although remaining profitable, earnings growth (before tax) slowed to 9.1% (F12: 35.7%) impacted by higher impairment charges and lower interest income due to the low interest rate environment. The liquidity ratio was maintained well above the prudential minimum of 20% throughout F13.

Strong asset quality indicators, a positive earnings trend and further strengthening of the group’s competitive position could lead to an upward ratings migration. The ratings could face downward pressure if earnings and asset quality (as reflected by NPLs in both nominal and percentage terms) deteriorate due to imprudent loan growth, deteriorating economic, regulatory and political environments across operating jurisdictions, and the spillover effects of a weak global market.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Jul/2005)
Long term: A(KE); Short term: A1-(KE)
Outlook: Stable

Last rating (Sep/2013)
Long term: AA-(KE); Short term: A1+(KE)
Outlook: Stable
ANALYTICAL CONTACTS

Primary Analyst
Jennifer Mwerenga
Senior Credit Analyst
(011) 784-1771
jennifer@globalratings.net

Committee Chairperson
Dirk Greeff
Head: Financial Institution Ratings
(011) 784-1771
dgreeff@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.

Equity Bank Limited 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 Equity Bank Limited with no contestation of the rating.

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 information received from Equity Bank Limited 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 report to management, 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.

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.

Collateral

Asset provided to a creditor as security for a loan.

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.

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.

Franchise

Business or banking franchise; a bank’s business.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Interest Rate

The amount paid by a borrower to a lender in exchange for the use of the lender’s money for a certain period of time. Interest is paid on loans or on debt instruments, such as notes or bonds, either at regular intervals or as part of a lump sum payment when the issue matures.

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.

Operational Risk

The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.

Regulatory Capital

The total of primary, secondary and tertiary capital.

Reputational Risk

The risk of impairment of an entity’s image in the community or the long-term trust placed in it by its shareholders as a result of a variety of factors, such as performance, strategy execution, the ability to create shareholder value, or an activity, action or stance taken by the entity.

Sovereign Risk

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

Strategic Risk

The risk of an adverse impact on capital and earnings due to business policy decisions (made or not made), changes in the economic environment, deficient or insufficient implementation of decisions, or failure to adapt to changes in the environment.

Tertiary Capital

Tertiary capital means accrued current-year uncapitalised net profits derived from trading activities; and capital obtained by means of unsecured subordinated loans, subject to such conditions as may be prescribed.

GCR affirms Equity Bank Limited’s rating of AA-(KE); Outlook Stable.

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