Johannesburg, 31 July 2017 — Global Credit Ratings (“GCR”) has affirmed Guaranty Trust Bank (Kenya) Limited’s long-term and short-term national scale ratings of BBB+(KE) and A2(KE) respectively; with the outlook accorded as Stable. The ratings are valid until July 2018.
SUMMARY RATINGS RATIONALE
The ratings of Guaranty Trust Bank (Kenya) Limited (“GTB Kenya”, “the group”) reflect its developing, albeit limited, regional penetration and appropriate risk management practices, partially offset by earnings volatility across its operating subsidiaries. Furthermore, the ratings are supported by the financial and technical support obtainable from Guaranty Trust Bank Plc (“GTB Plc”, “the parent”) domiciled in Nigeria, which holds a 70% stake in the group. GTB Kenya has regional presence, with cross border banking subsidiaries in Uganda and Rwanda collectively accounting for 26.4% (FY15: 28.3%) of group assets at FY16.
Capitalisation has remained strong underpinned by equity injections. The group’s regulatory capital grew by 4.8% to KES8.3bn at FY16, and Tier 1 and total capital adequacy ratios remained higher than peers and well above the regulatory minima of 10.5% and 14.5% respectively.
However, the group’s asset quality continued to weaken in FY16, with the gross non-performing loan (“NPL”) ratio increasing to 9.5% at FY16 (FY15: 8.7%, FY14: 7.4%) partly owing to the loan book that shrunk 2.8%. Specific provision coverage of NPLs decreased to 21.9% at FY16 (FY15: 44.5%), while net NPLs/total regulatory capital increased to 18% (FY15: 12.4%), underscoring the weakening quality of the group’s loan book. Furthermore, the group’s recoveries levels declined, illustrated by the recoveries/write-offs ratio decreasing (FY16: 0.3x, FY15: 1.1x, FY14: 5.5x). Write-offs have increased substantially over the cycle with no strong recoveries subsequently realised. The group’s loan book is well diversified across sectors with focus on performing industries. However, the group specialises in corporate clients hence diminishing the diversification benefits.
In FY16, the group registered growth in net profit after tax of 11.7% to KES434m. Net interest margin (“NIM”) increased to 7.9% at FY16 (FY15: 7%), benefitting from healthy interest spreads which averaged 10.3% for the banking sector. However, the implementation of the Banking (Amendment) Act in the last quarter of 2016 resulted in interest spreads contracting. The group’s efforts to streamline expenses resulted in the cost/income ratio improving to 75% at FY16 (FY15: 80.6%). And in spite of expanding revenue margins and costs rationalisation, ROaE and ROaA displayed modest growth to 5.5% and 1.1% respectively at FY16, largely owing to the tax burden that increased to 32.2% of pre-tax profits at FY16 (FY15: 11.6%).
Liquidity improved in FY16, with the positive asset/liability mismatch stretching to the 3-12 months maturity bucket. The cumulative positive liquidity gap provides the group with an adequate liquidity buffer to service its obligations. And given the short-term maturity profile of the group’s deposit book (an industry structural feature), cash holdings remained conservative representing 8.5% of the balance sheet at FY16.
Total liability funding including customer deposits decreased 2.4% at FY16, largely owing to repayment of intercompany loans. However, the group noted growth in customer deposits with current accounts deposits increasing 14.5% at FY16. With the new CBK directive that requires raising minimum interest rates for deposits, growing low cost funding such as current account deposits will be key to maintaining good interest margins.
Substantial improvement in asset quality, and stronger earnings generation enhanced by strengthening of the group’s competitive position, could positively impact the ratings. Maintaining a high risk profile loan book while shareholder support in the form of capital injections diminishes, could prompt a negative rating action. Furthermore, downward pressure could stem from weaker penetration in key markets.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2007)||Last rating (July 2016)|
|Long-term: BBB(KE); Short-term: A2(KE)||Long-term: BBB+(KE); Short-term: A2(KE)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Vimbai Muhwati|
|Credit Analyst||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Kenya Bank Statistical Bulletin (December 2016)
Guaranty Trust Bank (Kenya) Limited rating reports (2007-16)
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.
Guaranty Trust Bank (Kenya) Limited participated in the rating process via face-to-face management meetings 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 Guaranty Trust Bank (Kenya) Limited with no contestation of the ratings.
Information received from Guaranty Trust Bank (Kenya) Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results as at 31 December 2016 (and four years comparative numbers);
• Unaudited management accounts at 31 March 2017;
• Budgeted financial statements for 2017;
• Latest internal and/or external audit report to management;
• A breakdown of facilities available and related counterparties;
• Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
The ratings above were solicited by, or on behalf of, Guaranty Trust Bank (Kenya) 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.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Net Interest Margin||Net interest income divided by average interest earning assets. Measures a bank’s margin after paying funding sources and how successful a bank’s interest-related operations are.|
|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.|
|Regulatory Capital||The total of primary, secondary and tertiary capital.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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 glossary of terms please click here
GCR affirms Guaranty Trust Bank (Kenya) Limited’s rating of BBB+(KE); Outlook Stable.