Johannesburg, 30 September 2020 – GCR Ratings (“GCR”) has affirmed the Kenyan long and short-term issuer ratings of Kenya Police Sacco Society Limited of BBB(KE) and A3(KE) respectively, with the outlook accorded as Positive.
|Rated Entity||Rating class||Rating scale||Rating||Outlook/Watch|
|Kenya Police Sacco Society Limited||Long Term Issuer||National||BBB(KE)||Positive Outlook|
|Short Term Issuer||National||A3(KE)|
The ratings on Kenya Police Sacco Society Limited (“Kenya Police Sacco”, “the Sacco”) reflect a limited competitive position, strong capitalisation, solid risk position, stable funding structure and appropriate liquidity.
Kenya Police Sacco is a deposit-taking co-operative society. The Sacco operates exclusively in Kenya, and its common bond allows membership to serving and retired Kenyan police employees, civil service employees, corporate entity employees, the business community, and the direct family of members. Even with the widened membership scope, the overwhelming majority of the membership remains police officers, and as such, the business line, geographic diversification and market share of the entity is all inherently weaker than broader rated financial sector peers. Positively, as at FY19, Kenya Police Sacco was the third biggest deposit-taking Sacco in Kenya, with a 5.7% deposit market share. Therefore, we consider its business stability and competitive position versus deposit-taking Sacco’s in Kenya to be good. Furthermore, we believe that the role and status of the entity has inherently garnered strong customer loyalty, and helps maintain good revenue stability which is expected to continue in FY20, albeit impacted by the resultant restrictions on movement and economic disruption caused by the COVID-19 pandemic. Nevertheless, the entity is relatively small and undiversified in comparison to larger top tier financial service providers. We estimate that Kenya Police Sacco would have around 0,5% of total financial service deposits (banks and deposit taking non-banks).
The Sacco’s strong capital position is a key rating strength, with a GCR Leverage ratio of 22.7% for FY19. The capital position is structured around strong member capital contributions, and supported by historically good internal capital generation (with return on assets in the 5% to 7% range over the past four years) and a lower than peers dividend pay-out ratio (c. 17% for FY19, immediate peers in 30% to 50% range). Half year 2020 earnings were materially impacted by COVID-19 and the resultant significantly higher cost of risk. However, we expect some stabilisation towards year end, even though earnings will be restrained versus previous periods. As a result, GCR expects the strong capital position to persist into the long term.
Kenya Police Sacco’s risk position is a positive ratings factor. The Sacco’s risk position is in line with deposit-taking Sacco peers, but better than the wider financial institutions sector. This is supported in part by the Sacco model, which includes salary deductions, collateral and suretyship within its underwriting process, no foreign currency lending and small lending concentrations. However, in the long run, the Sacco’s risk position could evolve as diversification into the business sector, and other non-salary backed borrowers occurs. The economic impact of COVID-19 has had an effect, with credit losses increasing to 1.9% at 30 June 2020 from 0.06% at 31 December 2019. However, we do not expect an increase beyond this level over the next 12 – 18 months.
The funding and liquidity position of the entity reflects the very stable funding structure, with ‘non-withdrawable’ deposits (member deposits that can only be withdrawn if loans are fully paid down and the member is leaving the Sacco) accounting for c.90% of total customer deposits at FY19. The Sacco’s funding structure has proven to be robust, evidenced by withdrawal levels not increasing sharply even with the ongoing pandemic. The deposit book is also very diversified, with the top 20 depositors accounting for less than 1% of total deposits. Negatively, with a cost of funding of over 10%, the Sacco’s funding is materially more expensive than that of tier 1 and 2 banks which approximately range between 5% and 7%. We also consider the liquidity to be adequate, with a 2x GCR liquid assets coverage of withdrawable customer deposits at FY19, and GCR liquid assets covering 16% of total deposits at 1H2020.
The outlook is positive. This reflects our expectation of the Sacco’s cost of risk continuing to outperform the sector and some normalisation of earnings over the next 12 months. We expect the capital position to remain strong, supported by a GCR leverage ratio above 20%, driven mainly by good earnings and a conservative dividend policy, relative to peers. The risk position is expected to remain in line with direct peers but better than the sector average, with credit losses expected to peak at around 2% over the outlook horizon. The liquidity position is expected to remain adequate for the structure of funding.
An upgrade could arise from a stabilisation in the risk position, with some normalisation of earnings. A downgrade could arise from a deterioration in the capital position, as a result of weaker earnings, or a more aggressive dividend policy. Further, a material deterioration in the risk or liquidity position could also result in a downgrade.
|Primary analyst||Thandolwenkosi Mkwanazi||Financial Institutions Analyst|
|Johannesburg, ZA||ThandolwenkosiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
Kenya Police Sacco Society Limited
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||4.00|
|Sector risk score||1.50|
|Management and governance||0.00|
|Capital and Leverage||3.00|
|Funding and Liquidity||0.50|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures 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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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 Rating||See GCR Rating Scales, Symbols and Definitions.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATING
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Kenya Police Sacco Society Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Kenya Police Sacco Society Limited participated in the rating process via telephonic management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from Kenya Police Sacco Society Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Kenya Police Sacco Society Limited as at 31 December 2019;
- Unaudited financial results of Kenya Police Sacco Society Limited as at 30 June 2020;
- Management letter from auditors December 2019;
- Industry comparative data.