Johannesburg, 31 October 2018 – 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 2019.
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 ratings reflect its core business in Kenya, supported by better than average geographic diversification, good revenue stability, adequate levels of capitalisation that benefits from above average levels of internal capital generation, low credit losses and risk concentrations, stable funding and good liquidity.
EGH is the non-operating holding company for the Equity Group. The group operates in six markets in the East and Central African Region. As at FY17, Equity Bank Kenya (“EBK”) contributed 75% of total assets, with the other 25% broadly split between the DRC, Uganda, Tanzania, Rwanda and South Sudan, in order of size. The group is one of the largest financial service providers in the region.
In Kenya, EBK is the second largest bank, with a deposit market share of over 10%. As a result, we consider the bank to be of systemic importance to the domestic regulators. The group derives competitive advantage through its strong retail and small and medium enterprises (“SME”) franchise. At FY17, corporate and SME loans were over 80% of total revenues. Revenue stability has been strong over the past five years, with consistent revenue growth over the period, despite the impact of interest rate caps.
With a tier 1 ratio of 18.3% at 1H18, GCR considers the capitalisation of the bank to be adequate, albeit deteriorating from 19.6% one year earlier. Positively, capital adequacy is supported by strong internal capital generation, averaging over 25% for the past two years. The earnings profile is supported by strong interest margins (in part a reflection of relatively lower funding costs) and good cost control in comparison to regional peers. In 1H18, the group continued to grow its bottom line, supported by interest margin growth and lower risks costs, against slightly subdued non-interest revenues. We anticipate the group to maintain a ROA and ROE of 4% and 23% respectively over the next two years.
We consider the risk position of the group to be broadly supportive of the credit profile. This opinion reflects low credit losses for a bank operating in the East and Central African region and lending to the SME and retail space, averaging just over 1% of the past three years. Furthermore, non-performing loans (“NPLs”) are low, partially due to consistent write-offs. We view loan loss reserving to be adequate, with coverage for NPLs to be good but coverage over total classified lending to be less robust. Given the loan books focus on retail and SME we expect loan concentrations to be low.
Around 30% of the loan book is extended in foreign currency (“FX”), which introduces some additional risk in a USD appreciation cycle. However, the degree of FX lending is in line with regional peers and the group operates a very small net open position.
The funding structure of the group is stable, with core customer deposits contributing around 73% of the total liability base. Deposits are split somewhat evenly between retail and corporate, however they are originated at a price advantage versus peers, which demonstrates the strength of the group’s franchise and distribution capabilities. Liquidity is considered to be good, with broad liquid assets covering 4x wholesale funding or 50% of total customer deposits.
The outlook is stable. We expect the group’s earnings to remain strong, increasing 15% – 18%, driven mainly by interest income growth of 8% – 10% as a result of the net interest margin recovering to 8%. Liquidity is expected to remain robust. Earnings retention is expected to continue, further increasing the already adequate capitalisation. The stable outlook also reflects the group’s strong franchise which allows the group to grow its loan book in a challenging operating environment while maintaining above average asset quality.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2005)||Last rating (September 2017)|
|Long-term: AA-(KE); Short-term: A1-(KE)||Long term: AA-(KE); Short term: A1+(KE)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Vimbai Muhwati||Thandolwenkosi Mkwanazi|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Kenya Bank Statistical Bulletin (December 2017)
EGH rating reports (2005-17)
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 ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were 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 are unsolicited and accorded based on publicly available information.
The credit ratings have been disclosed to Equity Group Holdings Plc.
Equity Group Holdings Plc did not participate in the rating process, though GCR is satisfied that the public information available was sufficient.
The following information was received from to Equity Group Holdings Plc:
- Audited financial results of the group as at 31 December 2017 (plus four years of comparative figures)
- Unaudited Equity Group Holdings Financial Statements as at 30th June 2018
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.