Johannesburg, 23 November 2017 — Global Credit Ratings has affirmed Kenya Police Sacco Society Limited’s long-term and short-term national scale ratings of BB+(KE) and B(KE) respectively; with the outlook accorded as Stable. The ratings are valid until October 2018.
SUMMARY RATINGS RATIONALE
Global Credit Rating (“GCR”) has accorded the above credit ratings to Kenya Police Sacco Society Limited (“Police Sacco”, “the society”) based on the following key criteria:
The ratings of Police Sacco reflect its growing local franchise in payroll lending, buoyant earnings performance, strong capitalisation, and enhancements to risk management practices. Police Sacco is the fourth largest deposit taking savings and credit cooperative (“DT-Sacco”) society in Kenya, with a market share of 5.1% (in terms of assets) out of the 175 registered DT-Saccos at end-2016. The society’s franchise is built on member based lending targeting employees of the National Police Service and the wider business community, civil service and other salaried employees.
Pre-tax earnings rose 74.9% to KES812m in FY16, attributable largely to the society’s newly implemented I-Cash facility (a mobile platform for loan application) that attracted a positive customer sentiment propelling growth in interest income. The society maintains an optimal fixed/floating rate borrowing mix to manage cost of funding. In FY16, the society retired a fixed interest rate loan (deemed to be expensive in light of interest rate caps) and consequently net interest margin rose to 9.1%, continuing the upward trajectory. Further enhancement to earnings growth stem from the society’s operational efficiencies that continued to see the cost/income ratio decline to 42.7% for FY16 (FY15: 46.3%). After-tax earnings grew 81.5% to KES793m in FY16, benefitting from growth in tax exempt members’ interest income and consequently the tax provision decreased 31.7%. Overall, the society’s ROaE and ROaA strengthened to 21.2% and 4.2% in FY16 respectively (FY15: 13.8% and 2.6%).
The society maintained strong capitalisation metrics in FY16. Core capital grew by 25.1% to KES4.2bn at FY16, supported by strong earnings generation and a conservative dividend rate of 17% on share capital. The society maintains a non-distributable statutory reserve funded by appropriations from retained earnings. The statutory reserve is unencumbered and is designed with the ability to absorb losses and to enable the society to meet required capital ratios. That said, the society reported a core capital to total assets ratio of 20.8% at FY16, against a regulatory minimum of 10%.
Asset quality remained sound exhibiting low delinquency levels premised on the society’s payroll deductible loan product that enhances collections. The gross non-performing loan ratio (“NPL”) increased to 2.1% at FY16 (FY15: 0.6%), albeit below industry average of 5.2% and regulatory prudential maximum of 5%. The society enhanced its affordability assessments and loan monitoring and collection strategies to reduce NPL formation.
The liquidity ratio stood at 32% at FY16 (FY15: 39%) against a statutory minimum of 15%. The decline in the liquidity ratio was mainly due to increase in withdrawable deposits and decrease in the proportion of liquid assets on the balance sheet. Nonetheless, the society’s stable funding (comprising equity and non-withdrawable deposits) make up 91.6% of total funding at FY16, mitigating liquidity pressures in the short term.
The maintenance of adequate capital and liquidity buffers, a positive earnings trend, sound asset quality, enhanced risk management oversight, and further strengthening of the society’s domestic competitive position, will be positively considered. Negative rating action would likely follow a significant deterioration in asset quality, diminished earnings, liquidity and capital metrics and/or breach of key prudential benchmarks.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (November 2016)|
|Long-term: BB+(KE); Short-term: B(KE)|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Jennifer Mwerenga|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
Criteria for Rating Finance and Leasing Companies (March 2017)
Kenya Police Sacco Society Limited rating reports (2016)
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 was 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 ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Kenya Police Sacco Society 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 Kenya Police Sacco Society Limited with no contestation of the ratings.
Information received from Kenya Police Sacco Society Limited and other reliable third parties to accord the credit ratings included:
• Audited financial results of the society as at 31 December 2016 (plus four years comparative numbers);
• Unaudited interim results of the society as at 30 June 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, Kenya Police Sacco Society 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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|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.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|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.|
|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.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Retained Earnings||Earnings not paid out as dividends by a company. Retained earnings are typically reinvested back into the business and are an important component of shareholders’ equity.|
|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.|
|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 Kenya Police Sacco Society Limited’s rating of BB+(KE); Outlook Stable.