Johannesburg, 28 September 2018 — Global Credit Ratings has affirmed the national scale ratings assigned to NIC Bank Kenya PLC of A(KE) and A1-(KE) in the long-term and short-term respectively; with the outlook accorded as Stable. The ratings are valid until August 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to NIC Bank Kenya PLC (“NIC”, “the bank”) based on the following key criteria:
The ratings on NIC, formerly NIC Bank Limited, are supported by adequate market position, adequate capitalisation, and good liquidity. The ratings are however restrained by weak asset quality, the depressed interest income for the Kenyan banking sector owing to regulatory interest caps and an undependable economic environment, and high risk concentration. We may bring down the rating should pressure on asset quality and earnings persist, risk concentration increases without adequate reserving and high quality collateral, and the capital buffer shrinks further.
The outlook is stable reflecting our opinion that the bank’s risk-adjusted capital adequacy ratio (“CAR”) will remain adequate over the intermediate horizon supported by conservative growth in risk lending assets, increasing allocation to liquid risk free treasury securities, and positive internal capital generation.
Market position is adequate. The bank’s key competitive strengths of market leading position in asset finance, operational efficiency, and an adequately diversified product portfolio supports revenue stability. However, we view the bank’s funding structure (largely wholesale deposits) to be less favourable to Tier 1 banks. NIC’s market share of deposits of 4.5% is adequate given the fragmented banking sector.
Capitalisation is just adequate, supported by steady internal capital generation and growth in low risk assets. Tier 1 CAR registered 19.2% at FY17, 50bps up from the prior year, against the regulatory minimum of 10.5%, however reducing by 400bps to 15.2% at 1H18 due to significant provisions adjustment to retained earnings on implementation of IFRS 9. We think that the group’s loan loss reserve coverage (45.7% at FY17) is not sufficient enough. The bank’s earnings generation is weak, driven by the CBK’s capping of banks’ interest spreads. Furthermore, earnings pressure from the increasing cost of funding is likely to persist in our opinion, given the bank’s funding structure which largely comprises wholesale deposits.
Asset quality remains weak. Although the gross non-performing loans (“NPLs”) ratio remained somewhat stable at 11.0% at FY17, it increased to 12.8% at 1H18. Special mention loans (arrears portfolio) increased significantly (39.6%) during FY17, reflecting further weakening asset quality. We are also cautious of the declining level of recoveries from written off loans. High risk concentration remains a concern with top 20 loans accounting for 150% of capital and foreign currency lending representing 43% of the loan book at FY17.
Although upside potential is limited over the outlook horizon, a positive rating action may follow a material improvement in asset quality, strengthened capitalisation supported by good earnings generation, sustained good liquidity position, and reduction in concentration risk. We may lower the rating if there is further deterioration in asset quality without an increase in capitalisation, reduced internal capital generation and increasing concentration risk.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2002)||Last rating (August 2017)|
|Long-term: A+(KE); Short-term: A1(KE)||Long-term: A(KE); Short-term: A1-(KE)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Simbarake Chimutanda||Matthew Pirnie|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2017)
NIC Bank Kenya PLC rating reports (2002-17)
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 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.
NIC Bank Kenya PLC participated in the rating process via teleconference management meeting 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 NIC Bank Kenya PLC.
Information received from NIC Bank Kenya PLC and other reliable third parties to accord the credit ratings included:
• Audited financial results of the group as at 31 December 2017 (and four years comparative numbers);
• Unaudited interim results of the group as at 30 June 2018;
• Budgeted financial statements for 2018;
• 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, NIC Bank Kenya PLC, 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.|
|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.|
|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.|
|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 NIC Bank Kenya PLC’s national scale rating of A(KE); Outlook Stable.