Johannesburg, 11 August 2016 – Global Credit Ratings has affirmed the national scale ratings assigned to Equity Group Holdings Limited of AA-(KE) and A1+(KE) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until August 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Equity Group Holdings Limited’s (“EGHL”, “the group”) based on the following key criteria:
The accorded ratings of EGHL reflect its established market position in Kenya and growing African footprint, supported by an inclusive consumer and small-to-medium enterprises (“SMEs”) financial services franchise. The group’s strong capitalisation and asset quality, sound liquidity buffers, high retail funding composition, and stable financial performance in FY15, are key rating strengths.
EGHL is a non-operating holding company. Equity Bank (Kenya) Limited (“EBKL”) is a wholly-owned subsidiary of EGHL and the main operating entity (accounting for 77% of group assets at FY15). The group’s regional banking subsidiaries and non-banking subsidiaries in Kenya are held directly by EGHL.
In line with its expanding African vision to champion socio economic prosperity on the continent via inclusive financial products, the group is expanding its presence beyond the East African region. Accordingly, EGHL acquired ProCredit Bank, which is based in the Democratic Republic of Congo, in Q3 2015. The group’s external assets (outside Kenya) contributed 23% of EGHL’s consolidated assets at FY15 (FY14: 20.5%).
Robust internal capital generation (FY15: 24.2%) has supported the group’s capital base, which remains strong for the current level of risk. At FY15, the total risk-weighted capital adequacy ratio (“CAR”) for the group was 19.7% (FY14: 21.0%).
Driven by net loan growth of 26% and higher write-offs (KES3.1bn in FY15 vs. KES0.7bn in FY14), gross non-performing loans (“NPLs”) declined to 3.4% of gross loans and advances at FY15 (FY14: 4.3%), which compared favourably to the domestic banking industry average of 6.1% at FY15 (FY14: 5.4%) and the group’s internal target of below 5%. Specific provisions covered 62.4% of NPLs at FY15 (FY14: 69.3%), pre-collateral. NPLs are fully covered after taking into account the fair value of collateral. However, collateral realisation is considered a problematic and lengthy process in operating jurisdictions. Notwithstanding this, relative to capital, net NPLs were low at 4.7% at FY15 (FY14: 4.6%).
Key profitability metrics remained relatively stable in FY15, while the bank’s earnings growth was flat. EGHL posted an after-tax profit of KES17.3bn. The group achieved a ROaE and ROaA of 25.6% and 4.5% in FY15 respectively, despite investments in IT, mobile and internet banking services.
The liquidity ratio was maintained well above the prudential minimum of 20% (across all subsidiaries) throughout FY15, and currently stands at over 40% for the group.
The group’s ratings could be positively impacted by a substantial enhancement of its market share, while maintaining sound financial fundamentals. Downward pressure on the ratings could arise from sustained pressure on profitability stemming from a sharp rise in loan loss provisions, inadequately controlled growth and a higher susceptibility to regulatory, political and economic changes across operating jurisdictions, or from a marked decline in liquidity or capitalisation.
NATIONAL SCALE RATINGS HISTORY
Initial rating (July 2005)
Long term: A(KE); Short term: A1-(KE)
Last rating (August 2015)
Long term: AA-(KE); Short term: A1+(KE)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Kenya Bank Statistical Bulletin (December 2015)
Kenya Operating Environment Overview (May 2016)
EBKL and EGHL rating reports (2005-15)
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.
Equity Group Holdings 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 ratings have been disclosed to Equity Group Holdings Limited with no contestation of the rating.
The following information was received from to Equity Group Holdings Limited:
- Audited financial results of the group as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the group as at 30 June 2016
- 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, Equity Group Holdings Limited, 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
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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).|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|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.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|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.|
|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.|
|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 Equity Group Holdings Limited’s rating of AA-(KE); Outlook Stable.