Johannesburg, 30 September 2017 – Global Credit Ratings has affirmed the national scale ratings assigned to Equity Group Holdings Plc (formerly 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 September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Equity Group Holdings Plc (“EGH”, “the group”) based on the following key criteria:
The accorded ratings assigned to EGH reflect its strong competitive position in Kenya’s banking industry, which is underpinned by a favourable market reputation, as well as a resilient and innovative financial services business, spread across East Africa and the Democratic Republic of Congo.
EGH is a non-operating holding company. Equity Bank (Kenya) Limited, a wholly-owned subsidiary of EGH and the group’s main operating entity, accounted for 80.2% of group assets at FY16. The group’s banking and non-banking subsidiaries are held directly by EGH.
Profitability remained resilient in FY16 despite challenging operating conditions, characterised by economic and political uncertainty and unfavourable banking developments in Kenya. EGH posted an after-tax profit of KES16.6bn (FY15: KES17.3bn), despite a sharp rise in impairments. The group achieved a ROaE and ROaA of 21.7% and 3.7% in FY16 respectively, driven by efficiency gains from digitalisation and higher margins.
Robust internal capital generation (FY16: 20.4%) supported the group’s capital base, which remains strong for the current level of risk. At FY16, the total risk-weighted capital adequacy ratio for the group was 18.9% (FY15: 19.7%).
The capping of interest rates and rising asset quality pressure in Kenya’s banking market saw a slowdown in credit growth. The bank’s net loan growth was negative in FY16 following successive years of high loan book expansion. Gross non-performing loans rose to 6.8% of gross loans at FY16 (FY15: 3.4%). Despite increased asset quality risk, which has been exacerbated by the group’s focus on lending to small-and-medium sized enterprises, GCR expects EGH to maintain its track record of strong profitability and capitalisation, in turn, providing adequate protection against downside risks.
The group’s ratings could be positively impacted by an enhancement of its market share, increased earnings diversification and higher support assumptions, while maintaining sound financial fundamentals. Downward pressure on the ratings could arise from sustained pressure on profitability stemming from a further significant increase 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 2016)
Long term: AA-(KE); Short term: A1+(KE)
Senior Credit Analyst
Senior Credit Analyst
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Kenya Bank Statistical Bulletin (December 2016)
EGH rating reports (2005-16)
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 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 Plc 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 Plc with no contestation of the rating.
The following information was received from to Equity Group Holdings Plc:
- Audited financial results of the group as at 31 December 2016 (plus four years of comparative figures)
- Unaudited interim results of the group 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, Equity Group Holdings Plc, 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.|
|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 please click here
GCR affirms Equity Group Holdings Plc’s rating of AA-(KE); Outlook Stable.