Johannesburg, 31 August 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to NIC Bank Limited of A+(KE) and A1(KE) in the long-term and short-term respectively; with the outlook accorded as Negative. The ratings are valid until August 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to NIC Bank Limited (“NIC”, “the group”) based on the following key criteria:
The ratings of NIC reflect a long history and established market position in Kenya, built off the back of its pioneering work in asset finance and corporate banking, although the group has recently expanded its scope, targeting the retail and small and medium sized enterprise (“SME”) segments. Furthermore, the ratings capture the group’s strong capitalisation, resilient financial performance and demonstrated shareholders commitment. However, these positive rating drivers have recently been somewhat counterbalanced by significant deterioration in asset quality. Some asset quality pressure has been evident throughout the industry.
NIC has regional presence, with cross border banking subsidiaries in Tanzania and Uganda in addition to its non-banking subsidiaries (bancassurance, brokerage, leasing, properties and investment banking) in Kenya. The subsidiaries contributed a combined 6.5% of the group’s consolidated assets at FYE15 (FYE14: 7.0%).
Capitalisation has remained strong despite high asset growth. The group’s Tier 1 and total capital adequacy ratios of 14.9% and 20.6% at FYE15 respectively (FYE14: 14.9% and 21.0%) remained well above the minimum statutory requirements of 10.5% and 14.5% correspondingly.
Asset quality came under pressure in F15, on account of slowing economic activity, exacerbated by rising interest rates and an unfavourable business environment and compounded by robust loan growth in recent periods. To this end, the group’s gross non-performing loan (“NPL”) ratio escalated to 11.2% at FYE15 (FYE14: 3.9%). NIC’s specific provision coverage decreased to 21.0% at FYE15 (FYE14: 66.5%), while its net NPL to capital ratio increased to 33.5% (FYE14: 5.9%), relative to a peer average of 65.3% and 7.6% respectively.
The strong 19.1% growth in operating income (driven by higher interest and non-interest income) was somewhat offset by the 5.0x rise in impairment charges following the sharp growth in NPLs. Consequently, pre-tax profit growth slowed by 2.7% to KES6.4bn in F15 (F14: 24.4%). Benefiting from tax relief which resulted in a 9.5% decline in tax, NIC’s profit after tax increased by 9.0% to KES4.5bn in F15 (F14: 27.2% increase). The group’s ROaA and ROaE remained sound despite declining to 2.9% (F14: 3.1%) and 18.4% (F14: 20.6%) in F15 respectively.
In spite of the asset and liability mismatch and consequent negative liquidity gaps (a structural industry feature), the liquidity ratio was maintained above the prudential minimum of 20% throughout F15.
The group’s ratings could be positively impacted by consolidation and substantial enhancement of its market share, together with appropriate deployment of capital/funding, continued solid financial performance and reduced reliance on wholesale depositor funding supported by the SME and retail strategy. An inability to arrest the weakening in asset quality, and/or a decline in capitalisation and profitability, and uncontrolled growth or adverse economic developments, could see the ratings come under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2002)|
|Long-term: A+(KE); Short-term: A1(KE)|
|Last rating (August 2015)|
|Long-term: A+(KE); Short-term: A1(KE)|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Jennifer Mwerenga|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other updated March Financial Institutions, updated March 2016
Kenya Bank Statistical Bulletin 2015 (December 2015)
Kenya Operating Environment Overview (May 2016)
NIC rating reports (2002-15)
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 Limited participated in the rating process via face-to-face management meetings, teleconferences 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 Limited with no contestation of the rating.
- The following information was received from to NIC Bank Limited: Audited financial results of the group as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the group as at 30 June 2016
- Budgeted financial statements for 2016
- Latest internal and/or external audit report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, NIC Bank 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 SECTOR 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.|
|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.|
|Impairment||Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.|
|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.|
|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.|
|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 detailed glossary of terms utilised in this announcement please click here
GCR affirms NIC Bank Limited’s rating of A+(KE) ; Outlook Negative.