Johannesburg, 30 June 2017 – Global Credit Ratings (“GCR”) has affirmed KCB Bank Kenya Limited’s long-term and short-term national scale ratings of AA(KE) and A1+(KE) respectively; with the outlook accorded as Stable. The ratings are valid until June 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to KCB Bank Kenya Limited (“KCB Bank”; “the bank”) based on the following key criteria:
KCB Bank was established on 1 January 2016 as a result of the corporate restructure of Kenya Commercial Bank Limited (renamed KCB Group Plc) which, prior to January 2016, operated both as a licensed bank and a holding company for its subsidiaries. The newly formed KCB Bank took over the banking business in Kenya together with its assets and liabilities, and is a wholly owned subsidiary of KCB Group Plc (“KCB Group”, “the group”), accounting for 84.8% of the group’s consolidated assets and 97.9% of pre-tax profit at FY16. The accorded ratings reflect KCB Bank’s established domestic market position, risk appropriate capitalisation, sound liquidity position, resilient earnings performance and support from its shareholders.
The bank reported total and Tier 1 capital adequacy ratios of 19.9% (FY15: 15.4%) and 16.9% (FY15: 14.1%) respectively at FY16, which were well above regulatory capital minima, providing an ample capital cushion for loss absorption and growth. However, IFRS 9 (set to be implemented in 2018) is expected to lead to higher provisioning and earlier recognition of credit losses. KCB management expects a transitional increase in balance sheet provisions in line with IFRS 9 requirements. In 2017, an assessment is being conducted with the help of external consultants, to assess the likely impact on earnings and regulatory capital.
Asset quality remained under pressure in the period under review with gross non-performing loans (“NPLs”) rising to 7.8% of gross loans at FY16 (FY15: 6.0%), driven by some single name defaults in the corporate and government/parastatal books. The domestic banking industry average gross NPL ratio stood at 9.1% at end-December 2016 (2015: 6.8%). KCB Bank’s specific provisions covered 33.5% of NPLs at FY16 (FY15: 32.6%), pre-collateral. NPLs net of specific provisions were 22.3% of regulatory capital at FY16 (FY15: 21.3%). NPL recovery efforts are ongoing and the bank has established processes for early detection of problem loans.
Notwithstanding higher credit costs and operating expenses, the bank reported a pre-tax profit of KES28.5bn for FY16 (up 21.5% from FY15), supported by loan book expansion, reduced funding costs, growth in fee and commission income, and gains from the sale of available-for-sale securities. Overall, the ROaE and ROaA increased to 24.4% (FY15: 21.6%) and 4.1% (FY15: 3.9%) in FY16 respectively. However, GCR expects Kenyan banks’ annuity income from loans to contract in FY17 in an environment of reduced pricing flexibility. This follows enactment into law of the Banking (Amendment) Act 2016, which established a ceiling on commercial banks’ lending rates and a floor on deposit rates effective from 14 September 2016. The full impact of interest rate caps/floors will become clearer in FY17. KCB has increased focus on growing non-interest income and cost reduction to support earnings growth.
The bank maintained an average net liquid assets to customer deposits ratio of 32.1% during FY16 (FY15: 30.3%), which was well above the minimum requirement of 20%.
Improved asset quality trends driven by low credit losses and sound underwriting, and steady operating (capital, liquidity and earnings) metrics given the increasingly challenging operating environment, would further strengthen KCB’s financial profile. Furthermore, the bank’s ratings (currently the highest for a Kenyan bank accorded by GCR) could benefit from a material positive change in the Group’s support assessment. Sustained pressure on profitability stemming from a sharp rise in loan loss provisions and a higher susceptibility to economic/regulatory changes and competitive pressures, or a marked decline in liquidity or capitalisation, could lead to negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2013)*||Last rating (June 2016)|
|Long-term: AA(KE); Short-term: A1+(KE)||Long-term: AA(KE); Short-term: A1+(KE)|
|Outlook: Stable||Outlook: Stable|
|*Kenya Commercial Bank Limited’s rating|
|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)
KCB Bank rating reports (2013-16)
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.
KCB 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 KCB Bank Kenya Limited with no contestation of the ratings.
Information received from KCB Bank Kenya Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results as at 31 December 2016
- 4 years of comparative numbers
- Unaudited interim results at 31 March 2017
- Budgeted financial statements for 2017
- Latest internal and/or external report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
The ratings above were solicited by, or on behalf of KCB 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.|
|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.|
|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.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|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.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
|Under Review||Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.|
For a glossary of terms please click here
GCR affirms KCB Bank Kenya Limited’s rating of AA(KE); Outlook Stable.